A rising share of highly indebted households and high housing prices pose serious macrofinancial risks. The impact of a house price decline in Sweden, with an associated loss of confidence in housing collateral, could be amplified by Swedish banks’ reliance on wholesale funding. Given the interconnectedness within the Nordic-Baltic financial systems such a shock could have significant spillover effects across the region.
Higher bank capital is not sufficient to mitigate risks. Households should be made more resilient in the short term by the adoption of a maximum debt-to-income ratio; strong political action should be addressed to remove obstacles to increasing housing supply while macroprudential policies should be used to moderate housing demand during the adjustment period; removing tax benefits associated with real estate holdings and funding is also needed to reduce imbalances.
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