Aino Bunge: Making it easier to borrow will not solve housing market challenges

The economy is close to a turning point – but risks remain

Ms Bunge noted that it is very positive that inflation has fallen and is expected to remain close to the 2 per cent target. Sweden is in a mild recession, but the outlook for 2025 is favourable and the economy is expected to improve during the year.

"The interest-rate sensitive parts of the economy are still weaker than normal, but we see signs that we are close to a turnaround. Turnover in the housing market has increased and housing construction is no longer falling. Household consumption is expected to increase, as real wages increase, interest rates fall and fiscal policy becomes more expansionary,” she said.

"We need to boost consumption to strengthen the economy. Stronger economic activity is important in itself, but also a necessary condition for inflation to stabilise close to the target.”

"To provide further support to the economy, we cut the policy rate again just before Christmas. Our forecast is that it may be cut one more time during the first half of 2025. As I argued at the December monetary policy meeting, I judge that it is better to do so in the near term rather than to wait."

She went on to say, “In uncertain times, it is essential that the Swedish economy has the best possible starting position.”

In this connection, Ms Bunge pointed out that it is important to take into account new information in each interest rate decision, as well as the uncertainty surrounding future developments.

"There are a number of clouds of uncertainty obscuring the outlook for inflation and economic activity. These are risks linked to developments abroad and geopolitics, as well as the recovery in the Swedish economy and the krona exchange rate. If the outlook for the economy and inflation changes, this could lead to a different monetary policy stance than that reflected in our December forecast for the policy rate."

High indebtedness creates vulnerabilities in the economy

Ms Bunge also highlighted some of the challenges facing the Swedish economy. She noted that while Sweden's public debt is low, private sector debt has increased sharply in recent decades. The high level of debt, together with short interest rate fixation periods, has made the Swedish economy more vulnerable.

Ms Bunge said that the high inflation and interest rates of recent years had acted as a wake-up call for many actors. This applies to property companies, but also to households with large debts.

”Macroprudential measures have safeguarded household resilience. Without amortisation requirements, mortgage caps and banks' credit assessments, households would have been less able to cope with the rapid rise in inflation and interest rates."

Ms Bunge noted that although interest rates are now falling, recent experience shows that we still need to be prepared for periods of higher interest rates. There must be conditions for monetary policy to do the job it has been given responsibility for without problems arising in certain parts of the economy.

She emphasised the need for all economic actors to be resilient in an uncertain world. For governments, this involves long-term objectives, such as debt anchors and expenditure ceilings, while the resilience of households and banks can be safeguarded through sound credit assessments, capital requirements and macroprudential measures.

Reforms urgently needed to improve the functioning of the housing market

Ms Bunge also commented on the inquiry's proposal for more generous credit rules for mortgages. She said that the Riksbank will return with a comprehensive response to a consultation. However, she felt that it is healthy for regulations to be evaluated, as the knowledge is constantly evolving. At the same time, she expressed concern that the proposed changes could increase financial risks, both for households and for banks. She also said the proposals could push up house prices, making it even harder for groups that already struggle to buy a home.

Ms Bunge therefore called for a broad review of housing and tax policies to improve the balance between supply and demand in the housing market. The aim is to create a better functioning housing market, both for rented and owned housing, and thus better conditions for long-term sustainable debt development in the household sector.

“Making it easier to borrow will not solve long-term housing market challenges,” concluded Ms Bunge.