Finansdepartementet

Challenges with high household debt levels - a Swedish perspective

Minister for Finance Anders Borg Thursday May 22, 2014

Finansdepartementet

Household debt and post-tax interest expenditure

Per cent of disposable income

Source: Riksbank

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1995 1997 1999 2001 2003 2005 2007 2009 2011

SE FI DK

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An international phenomenon Households’ debt to disposable income ratio, per cent. 1995-2011

Source: Eurostat

Finansdepartementet

High debt ratios for mortgage borrowers

Data from July 2013. Source: Riksbank

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Debt-to-households’-disposable-income ratios in different regions

Data from July 2013

Source: Riksbank

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Average loan-to-value ratio for new loans Per cent

Source: FSA

Finansdepartementet

What can explain the rise in debt levels?

- Rising household incomes and lower taxes

- Low real interest rates

- Low construction means limited supply

- Conversion of rental housing into condominiums

- Increased demand for central location means higher average home prices

Finansdepartementet

Risks from high household debt

• Macroeconomic – if interests rates rise dramatically, and/or home prices drop, consumption could be negatively affected and hit aggregate GDP growth

• Financial sector - lower consumption and weaker growth may in turn cause credit losses in the banking system

• Individual households - risks of insolvency of individual households with small financial margins

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Households have strong balance sheets Household assets and liabilities in percent of disposable income

Source: Riksbank

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Growth rate of household loans

Source: Statistics Sweden

Finansdepartementet

The Swedish Government’s measures to dampen household credit growth

• Higher risk weights on mortgages

• Loan-to-value cap (LTV)

• Individual amortisation plans

• FSA analysis of banks’ tests of household credit worthiness

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Higher capital requirements on large banks Core equity requirements in percent of risk-weighted assets

The November 2011 argreement: CET1 > 12%

Regulatory basic capital requirements

Institution specific pillar 2 requirements

Mortgage risk weights 15%

Mortgage risk weights 25%

Systemic risk in pillar 2

Systemic riskbuffer

Countercyclical buffer (not set yet)

Capital conservation buffer

The FSA:s new policy: CET1 > 16,4%

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Swedish housing construction low Number of housing starts per 1 000 inhabitants

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… but housing construction is picking up

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35000

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92

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3

SmåhusHyresrätterBostadsrätterFlerfamiljshus totaltNybyggnad totaltOmbyggnadHome reconstruction

Rental housing

Source: The Swedish National Board of Housing, Building and Planning

Forecast 2015: 38 000 homes

Single family houses

Apartments total

New homes total

XXXXXXX

Finansdepartementet

Potential hurdles before a building project can start

Appeals

Noise regulations

Infrastructure

”NIMBY”

Lack of municipality plans and land-use plans

National interest

Planning processes

Lack of a uniform, national application of rules and regulations

Finansdepartementet

Government strategy to improve the housing market

• More efficient use of the stock of dwellings • A better functioning housing market

• Shorter time span from conception to

finished home

Finansdepartementet

Summing up

• Household debt levels are high, but so are asset levels

• A number of measures taken to stimulate gradual downward trend in debt-to-income ratios

• Measures taken to address supply side restrictions in housing market

• Continue close monitoring of debt developments, prepared to act if trends go the wrong way