Ingves warns of need to ‘remain vigilant’
Stefan Ingves, Sweden’s top central banker, has warned that despite tightening rules on areas such as lending and financial supervision, there are “strong reasons to remain vigilant” in light of the ongoing property boom, which has followed the financial crisis in the country.
Ingves, the governor of the country’s central bank (Sveriges Riksbank) made the comment in response to the latest meeting of the parliamentary Committee on Finance, which has been probing the fiscal and monetary responses to the crisis, as well as the responses of bodies such as the Swedish Financial Supervisory Authority (Finansinspektionen).
“The decades prior to the crisis were marked by extensive deregulation of the financial markets,” Ingves said to the Committee in a prepared speech.
“There was a strong belief that the financial sector was to a large extent self-regulating, and that it was able to resolve most problems on its own through market incentives. This belief was seriously undermined during the crisis. There is now considerable international agreement that the market’s ability to ‘manage itself’ was overestimated, and that regulations need to be stricter and supervision tightened. Of course, what one wants to achieve is to reduce the risk of future financial crises. Although more and stricter regulations may be linked to a certain cost, for instance, in the form of higher interest rate margins, studies indicate that this is more than counterbalanced in the long run by more favourable economic development.”
Sweden stands out in terms of the global financial crisis because its housing market did not fall much in the wake of the credit crunch, Ingves said.
“It has been profitable for the banks to fund the increase in Swedish mortgage borrowing in the international capital markets. Funding in foreign currency has shown an increase. This has meant that Swedish households have been able to obtain mortgages at a lower cost and probably to a greater extent than would otherwise have been the case.”
Sweden’s red hot economy – GDP growth was about 6% in 2010 – has been another factor. Considerable sums are being invested in commercial and residential property ownership, although not necessarily on further construction. Ingves said that supply of residential property had lagged demand for the past 15 years, but that it was hard to find a single explanation for this. However, lack of supply could be seen as a fundamental factor why Swedish property prices have remained solid while property values in other developed markets have continued to fall. Ingves said that other countries saw their housing bubbles driven in equal measure by both demand and supply, leaving a much bigger supply glut relatively speaking when access to credit dried up and the financial crisis took hold.
Ingves noted that the Swedish central bank has moved to raise its repo rate several times since the low point of the credit cycle, while Finansinspektionen has issued a recommendation regarding a cap on the loan-to-value ratio, and the Swedish Bankers’ Association has issued recommendations regarding requirements for amortisation on new mortgages – all in an effort to head off any possible re-emergence of a property asset price bubble.
However, Ingves warned the Committee that “it remains to be seen whether these measures and the increased general awareness will be enough to slow down developments and bring us onto a less risky course.”
“Very recently there have been signs that developments in both lending to households and housing prices have entered a calmer phase. We are of course following developments very closely. Despite the calmer situation, there are nevertheless strong reasons to remain vigilant. If it turns out that this was not a break in the trend, but merely a temporary slowdown, and that housing prices and the build-up of debts among households accelerate again, we and others must be prepared to take action.”