The role of macroprudential policy in Sweden

A perceived housing price bubble in Sweden has led the government to propose a widening of the mandate of the Swedish FSA. This would enable the FSA to implement a range of different so-called macroprudential measures, as for example a cap on loan-to-income for individual households. Against this background, the Swedish Bankers’ Association has asked us to analyse how to best to curb the booming Swedish housing prices and give recommendations on the mandate of the Swedish FSA.

We find that the housing price boom in Sweden has largely been driven by fundamental factors such as highly expansionary monetary policy and changes in the tax policy. Thus, we suggest that the key to ease pressures on prices and to reduce risks to financial stability is to focus on these fundamental factors.

In contrast, we find that the suggested cap on loan-to-income is an ineffective measure to dampen the soaring housing prices. In addition, it will lead to a rigid credit assessment procedure for Swedish household, implying a welfare loss.

In general, we warn against using financial regulation to conduct macroeconomic stabilisation policy, and recommend that the mandate of the FSA should focus on financial stability.

The study is commissioned by the Swedish Bankers’ Association