(Bloomberg) -- Riksbank Governor Stefan Ingves said growing concerns over the state of the Swedish housing market didn’t come as a surprise but underscored his belief that the economy can withstand a slowdown.
A series of reports in recent weeks point to a rapidly cooling Swedish housing market, raising concerns the country could face a crash like the one it lived through in the early 1990s. The krona weakened almost 2 percent last week, and has continued to slide as investors wonder whether a property market slump is ahead.
The reaction in the currency market is “difficult to understand,” Ingves said in an interview after a press briefing on Wednesday. “But I’m not surprised that there is a conversation going on outside the country about our housing market given how we for years have mismanaged our housing market. Eventually that will lead to raised eyebrows abroad.”
Ingves said that now is actually not a bad time for the housing market to cool, given the strength of the Swedish economy and that a leveling off is to some extent good since it will lead to a more stable development and slow household debt growth.
First Deputy Governor Kerstin af Jochnick also said on Tuesday that the central bank doesn’t see “any major price declines” looming in the housing market. She also told reporters that weakness in the krona may be temporary. What’s more, weak October inflation data is nothing to worry about, she said. (Underlying inflation was 1.8 percent, economists had expected it to be at the bank’s target of 2 percent.)
With a key member of the Riksbank’s six-person board signaling that recent data are unlikely to trigger any revision of the latest guidance on unwinding stimulus, the krona soared against the euro on Tuesday. It also added to gains on Wednesday, climbing 0.2 percent to 9.88 per euro.
But the Riksbank on Tuesday and Wednesday issued reports, which both singled out extreme imbalances in Sweden’s housing market as the biggest threat facing the economy. SEB AB is warning clients that there’s a risk foreign investors will continue to sell the krona if there are a few more months of weak housing-price data.
The central bank’s report focused on households’ swelling mortgage obligations. On average for households with home loans debt was 338 percent of incomes as of September, up from 326 percent a year earlier, with the number of households at 600 percent or more rising to 260,000, the Riksbank said on Tuesday.
In a report on Wednesday titled “What If Swedish Housing Prices Drop 15-20 Percent?,” Danske Bank A/S says the property market development now poses a risk to economic growth and the inflation outlook.
“Previous downturns in the housing market suggest a fairly big impact on GDP via the residential investments,” Danske’s fixed-income research team in Stockholm said. “Our scenario implies sub-par growth but no recession.”
In such a scenario, which has a 35 to 40 percent probability, Danske expects that the fallout on private consumption means that “the Riksbank will have difficulties in making an interest rate hike as currently planned,” around the middle of next year. The bank is also advising clients to position for a “repricing of the rates market.”
“The krona is feeling the pain but the rates market has yet to adjust,” the bank said.
On Wednesday, the Riksbank said it backed a proposal by the regulator to impose stricter amortization rules and urged the government to reach “a decision on this matter.” It also warned that instability in the housing market puts Sweden’s banks at risk.
Ingves said he keeps “endlessly talking” about bringing down debt levels to save Sweden from a deeper downturn.
“It’s good if you have a loan-to-value ceiling and all those macro-prudential measures because without them you run the risk of constantly increasing risk in the system until you realize that that it what has happened and then it is too late,” he said.
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