Political Economy


IMF warns of Swedish housing market of an impending bubble

Thursday, 05 September 2013
The International Monetary Fund, IMF, has warned Sweden of a housing bubble and recommends Sweden for the introduction of interest-only loans as one of several measures to reduce risks of a housing bubble.
IMF warns that a Swedish housing bubble could cripple banks and create a financial crisis in the Nordic and Baltic countries.
The Swedish central bank, the Riksbank's forecasts of the repo rate is to remain at low 1 percent by the end of 2014. But now the IMF is warning for a Swedish housing bubble and recommends the establishment of rules for interest-only loans.Swedish housingInternational Monetary Fund (IMF) warns that a Swedish housing bubble/ scancomark.com
International Monetary Fund (IMF) warns that a Swedish housing bubble could cripple banks and create a financial crisis in the Nordic and Baltic countries. IMF warning is issued in a so-called Article IV report on Sweden and in a regional report on the Nordic region.

Risks arise from high household debt, which is among the highest in the OECD area. The problem includes banks that are large in relation to GDP and bank financing. According to the IMF report related risks associated with the Swedes, amortising little on the loans and the tax system has flaws.

IMF recommends that the introduction of regulations against interest-only loans, and see that it may be necessary to make the tax system and gradually phase out tax benefits as interest deductions for borrower.

With bank assets above 400 percent of GDP, Sweden’s banks are among the largest in the world relative to the size of the economy. About 85 percent of these assets are on the balance sheet of four major banks alone, which mostly lend across the Nordic region. More than 80 percent of the credit extended by these four banks goes to households and firms in Denmark, Finland, Norway, and Sweden.Swedish Krona

The IMF writes that the factors driving high household debt remain in place, including continuing easy access to low-amortization mortgages, very low interest rates, strong tax preferences for housing assets, and still elevated property prices.

As a consequence, a sudden and sizeable fall in house prices could have a flow-on effect to consumption—especially if it occurred against a background of normalizing interest rates from their current very low levels in Sweden and internationally in the medium term—raising unemployment and lowering inflation further.

This would translate into pressure on banks by pushing up non-performing loans and bank-funding costs. Given the extensive activities of Swedish banks in Denmark, Finland, and Norway, such a scenario would also have spillovers across the Nordic region.
by Scancomark.com Team

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