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Sweden’s escalating household debt: A familiar story

Customers wait outside a Swedbank AB branch in Malmoe. The escalation in Swedish household debt has gone hand in hand with house prices, which have increased threefold since 1995 as mortgage rates plunged from 10 per cent to 4 per cent.

Linus Hook/Bloomberg

Record household debt. Stern warnings from central bankers. Chronic angst about the housing market.

Sound familiar? In Sweden, as in Canada, the household-debt-to-disposable-income ratio has soared to historic highs, prompting fierce debate in Stockholm over what threat it poses to the overall economy.

Household debt in Sweden now stands at 173 per cent of disposable income, following a steady climb from just 90 per cent in the mid-1990s, according to figures from the Riksbank, Sweden's central bank. That's well above the current Canadian ratio of 163 per cent and beyond levels reached in the United States prior to that country's housing crash. Homeowners on both sides of the Atlantic have taken advantage of low interest rates , amassing debts some fear they will be unable to handle when borrowing costs rise or the job market worsens.

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The issue has drawn repeated cautions from Swedish central banker Stefan Ingves and was mentioned in a statement following the bank's recent decision to hold interest rates at 1.25 per cent, despite slowing economic growth.

"The issue of debt requires constant attention," Mr. Ingves said.

Reuters last week said the Swedish central bank was discussing linking changes to the country's key lending rate to household-debt levels.

The escalation in Swedish household debt has gone hand in hand with house prices, which have increased threefold since 1995 as mortgage rates plunged from 10 per cent to 4 per cent. Not surprisingly then, any debate about household debt eventually winds its way back to questions about the health of the housing market.

"If you can justify price levels in the housing market, you can also justify the high level of household indebtedness," said Robert Bergqvist, chief economist for investment bank SEB. "And I think you can justify the price levels."

Indeed, economists are considerably less ruffled by the high debt figure, pointing to a significant imbalance in the Swedish housing market that created a widening gap in supply and demand over the past 15 years. Demand for homes has swelled in this country of 9.5 million, due partly to demographic shifts and partly to an urbanization trend that is among the strongest in Europe. Yet even as Swedes clamoured to move into cities, high costs, government regulation and a scarcity of land limited the amount of new homes that were built.

"The supply never really picked up to match the demand," said Andreas Jonsson, a senior economist at Nordea Markets. "That's in contrast to the U.S., Spain or Denmark, where before the crash we saw investment in housing and construction really pick up."

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Also unlike these crisis-hit countries, the majority of household debt in Sweden was taken on by the richest and least economically vulnerable portion of the population, who tend to be insulated from spikes in unemployment. A full 60 per cent of mortgages in Sweden are held by the highest-earning fifth of the population, household savings have stayed strong and measures of affordability show that mortgage servicing costs are manageable, said Tina Mortensen, an economist at Citigroup.

"There are, however, some less reassuring factors," Ms. Mortensen said.

Those include a propensity for floating-rate mortgages and rules that allow for zero amortization periods. About half of all mortgages in Sweden now fall into the floating-rate category while estimates have put the average amortization period at more than 70 years. Those conditions leave Swedes particularly vulnerable to sudden changes in interest rates and external shocks, Ms. Mortensen said.

Such conditions also put the Riksbank in a tricky position. After surging out of the recession, Sweden's economy has experienced a sharp slowdown, due in part to its heavy reliance on exports to the troubled European Union. Unemployment, now at 7.8 per cent, is expected to rise to more than 8 per cent before levelling off next year. Manufacturers struggling against a sluggish market and strong kronor would benefit from a cut in interest rates.

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