Skingsley: Reforms in housing and tax policy are needed to resolve problems in the housing market
“With the help of extensive support measures, the Swedish financial system has coped relatively well during the pandemic and we have managed to avoid a financial crisis. But the risks to financial stability are still elevated. High household indebtedness and the large exposures of the major Swedish banks to residential and commercial property are increasing vulnerabilities”. These were the words of First Deputy Governor of the Riksbank Cecilia Skingsley when she spoke today at a digital webinar as part of DI Börsdagen 2021.
Date: 27/05/2021 09:30
Speaker: First Deputy Governor Cecilia Skingsley
Place: Dagens Industri Börsdagen conference
“Despite the crisis, housing prices have risen sharply over the past year, not only in Sweden but also in other countries. At the same time, mortgage rates have not fallen but have remained relatively stable. It is therefore difficult to draw the conclusion that the Riksbank’s monetary policy has been a decisive factor behind the sharp price upturn in the housing market during the pandemic”, Cecilia Skingsley said.
Other pandemic-related factors seem instead to have played a greater role. “Many Swedish people are working more from home and may therefore want to have more living-space. In addition, the negative effects of the crisis on the labour market have only affected households with permanent employment to a minor extent and these households normally find it easier to obtain a mortgage. The pandemic has exacerbated the insider/outsider problems we have in the housing market”, Cecilia Skingsley noted.
Monetary policy is too blunt an instrument for resolving problems in the housing market
The rise in housing prices over many years is largely due to long-term structural problems in the Swedish housing market. “At the Riksbank, we have been highlighting these problems for more than a decade. But we have no legal mandate or suitable tools to manage them and monetary policy is far too blunt a tool. Our monetary policy measures are providing broad support to the recovery that is now well under way. For example, if we were to substantially rise the interest rate to reduce housing prices, economic activity would slow with higher unemployment and lower inflation as a result,” Cecilia Skingsley said.
“To resolve the fundamental problems in the housing market, broad reforms are required in housing and tax policy that improve the balance between supply and demand. Possible measures include reviewing the regulations regarding the new production of housing, as well as the rent-setting system, the taxation of capital gains from housing property sales and also the property tax and tax relief on interest expenditure”, she added.
A crisis in the property market can threaten financial stability
In addition to housing, banks are substantially exposed to commercial property companies, which means that problems in the property sector can cause the banks major loan losses. Many property companies are highly leveraged and are vulnerable if interest rates were to rise rapidly or property prices were to fall sharply. The pandemic may also have accelerated a transition from brick-and-mortar retail to e-Commerce and it is uncertain what the long-term needs of tenants for office space will be after the pandemic. “The Riksbank is paying close attention to the property market and the problems it may cause the banking sector”, Cecilia Skingsley said in conclusion.