The key risks from very loose monetary policy are rising inflation and asset price bubbles. In spite of massive monetary stimulus in recent years, these risks have not materialised in the global economy as it continues its gradual recovery from the 2008 crisis. Nevertheless, there are areas of concern. One such area is the Swedish housing market, where prices have been increasing rapidly.
House prices in Sweden have doubled in the past ten years. Moreover, the pace of increase has picked up recently, with house prices rising 13% during the past year. In line with house prices, household debt has increased. According to the European mortgage federation Swedish mortgage debt has reached 156% of disposible income, the third highest level in Europe (after Denmark and the Netherlands).
Meanwhile, the Riksbank’s policy rate has been negative since early this year, and currently stands at -0.35%. The Riksbank has acknowledged the risks related to the housing market and household debt levels, but for now remains inclined towards additional monetary stimulus (explicitly stating that ‘the repo rate can be cut further’).
Monetary stimulus holds risks, with one key risk being an overheating housing market. In this respect, the Swedish housing market is something to watch carefully. For now, the uptrend is likely to continue, but there are limits to how far this can go.