Sweden’s banks, which are among Europe’s best-capitalized, are warning that excess reserves can’t cool a property market at risk of overheating as they urge the government to address a chronic under-supply of housing.
“Just to increase capital ratios is the wrong tool,” Nordea Bank AB Chief Executive Officer Christian Clausen said yesterday in an interview in Stockholm. “If you have too little construction of new homes and you have too much demand, then there is an imbalance, and that has nothing to do with credit supply.”
Swedish regulators have taken a number of steps to try to stem growth in household borrowing and to cool house prices amid concern a bubble is developing. Measures have included capping mortgages at 85 percent of property values and tripling risk weights on banks’ mortgage assets. While the mortgage cap helped slow loan growth, borrowing has started to accelerate again and house prices are still climbing. That’s left Swedes with a record debt load equivalent to more than 170 percent of their disposable incomes.
Apartment prices, which more than doubled since 2000, increased 14 percent in the 12 months through August, according to Svensk Maeklarstatistik, which publishes monthly data on Swedish real estate. The price of single-family houses rose 4 percent since August last year, it said. State-owned mortgage bank SBAB warned on Oct. 18 that prices are likely to continue rising and that there is a risk of overheating.
The government’s response has been to blame the banks. Finance Minister Anders Borg has repeatedly threatened to raise capital requirements again next year to cool the housing market. Borg has also expressed a preference for addressing housing market imbalances by forcing banks to hold bigger buffers rather than by asking households to amortize their debt, as proposed by the financial regulator. The average Swedish household takes 140 years to pay down its mortgage, the Financial Supervisory Authority estimates.
Borg, who is part of a ruling coalition that is trailing the opposition in opinion polls ahead of September 2014 elections, said last month that a mortgage amortization requirement isn’t high on the agenda for the coming year and that there are “more natural” ways to curb household debt. This month, he ruled out limiting homeowners’ access to tax deductions on interest rates.
Michael Wolf, the CEO of Sweden’s biggest mortgage lender Swedbank AB, on Oct. 22 called on the government to address imbalances in the housing market by increasing the supply of housing. He said the approach would be more effective than raising capital requirements.
“We want to help our customers to buy a home and will gladly provide financing for new construction,” Wolf said this week in the bank’s third-quarter report. “But we are not willing to take part when the same properties are mortgaged at ever increasing levels. The increased capital requirements on banks are not an optimal way to provide a solution to Sweden’s problem of too little housing, which damps potential growth.”
Sweden’s rising house prices stem in part from a lack of rental properties in its biggest cities after about 160,000 properties across the country were converted into owner-occupied flats since 2000, according to data from Statistics Sweden. Construction is also failing to keep up with population growth. While greater Stockholm added 164,400 residents in the past five years, only 4,165 housing units were built in the Stockholm area in the first half of 2013.
The government introduced a mortgage cap in October 2010 that helped slow credit growth to a 20-year low of 4.5 percent last year, from a pace of more than 10 percent in the five years through 2008. Yet the pace of borrowing has since started to accelerate again. Lending to households rose 4.8 percent in August compared with 4.7 percent in June and 4.6 percent in April.
Sweden’s biggest banks are already subject to some of the strictest capital rules in the world, requiring them to hold a core Tier 1 ratio of at least 12 percent of their risk-weighted assets by 2015. Nordea, Swedbank, SEB AB and Svenska Handelsbanken AB already exceed that level. Handelsbanken’s and Swedbank’s ratios stood at 19.3 percent and 18.8 percent, respectively -- the highest among all major European banks. Nordea, Scandinavia’s biggest bank, had a core Tier 1 ratio of 14.4 percent.
SEB Chief Executive Officer Annika Falkengren said in the Stockholm-based bank’s third-quarter report today that “more regulation may not be the right regulation.” While “the ambition of the new regulatory framework is to establish efficient interfaces between supervision at the macro and micro levels,” which is “admirable,” it “remains difficult to assess the impact on the real economy,” Falkengren said.
“The world is complex with high interconnectivity and interdependencies and, as such, great care must be taken to avoid unintended consequences,” she said, as her bank posted a core capital ratio of 17.4 percent. “Gradual implementation and evaluation of new regulations are necessary.”
According to Clausen, who is also the head of the European Banking Federation in Brussels, forcing banks to raise capital ratios is proving a “very blunt tool” in cooling the housing market.
“It is a multitude of issues, you cannot only do it one way,” Clausen said. “So maybe other issues should come in, like amortization. Of course the banks could be part of the tools, I acknowledge that clearly, so we could have some amortization, maybe some higher risk-weights.”