Scandinavia’s mortgage model is adding risk to the region’s economies as too few homeowners pay down their debt, Moody’s Investors Service said.
While interest-only mortgages in Sweden and Denmark helped households keep up payments during the crisis, consumers now rely too much on the loans, according to Oscar Heemskerk, vice president and senior credit officer at Moody’s.
“We see vulnerability in that model,” he said in a June 5 interview in Stockholm.
At the current pace of amortization, Swedish households will need 140 years on average to repay their home loans, the Financial Supervisory Authority estimates. In Denmark, interest-only loans make up more than half the country’s $490 billion mortgage market, central bank figures show. Danes carry the world’s highest debt burden relative to disposable incomes, at more than 300 percent, the Organization for Economic Cooperation and Development estimates. Debt by that measure in Sweden and Norway hit record levels this year, central bank figures show.
Interest-only mortgages have made housing more affordable, helping send property prices to all-time highs this year in Norway and Sweden. In Denmark, households are still trying to recover from a burst property bubble that’s sent prices down more than 20 percent since their 2007 peak.
Distortions in the three AAA rated nations’ housing markets coincide with unprecedented central bank stimulus from Washington to Frankfurt to Tokyo, anchoring global interest rates at record lows and fueling credit growth in some of the world’s richest economies. Policy makers in Scandinavia are now trying to tackle credit-driven imbalances without fueling currency appreciations.
“House prices have continued to increase a lot in Sweden, and in Norway particularly, raising questions whether that can continue forever,” Heemskerk said. “What we have seen internationally, time and time again, is that if something goes up, ultimately there will be some corrections.”
Sweden and Norway were dragged through real estate and banking crises in the 1990s and banks in the region now face some of the world’s toughest regulatory requirements to prevent a repeat. Swedish lenders, among Europe’s best capitalized, will need to hold at least 12 percent core Tier 1 capital against their risk-weighted assets from 2015. Basel III sets a 7 percent minimum requirement from 2019.
The FSA in Stockholm told banks in 2010 not to provide mortgages that exceeded 85 percent of a property’s value. The regulator followed up this year by tripling risk weights on banks’ mortgage assets to 15 percent.
Though lessons from previous financial crises have helped Nordea Bank AB (NDA) and Svenska Handelsbanken AB (SHBA) steer through global market shocks better than their peers elsewhere, lenders in Scandinavia remain under pressure to do more to guard against housing-market risks.
Shares in Nordea, the largest Scandinavian bank, have gained 27 percent this year, compared with a 5.4 percent increase in the 40-member Bloomberg index of European financial stocks. Nordea fell 0.6 percent to 78.95 kronor as of 10:36 a.m. local time today, compared with a 0.2 percent gain in Bloomberg’s benchmark index of European bank stocks.
The International Monetary Fund is urging Sweden, the largest Nordic economy, to consider imposing minimum amortization rules to prevent a property bubble. The Washington-based fund also said May 31 that 35 percent would be a safer risk-weight requirement for Sweden’s banks than the 15 percent agreed last month. That was the main criticism leveled against Sweden by the IMF, which estimates the $500 billion economy will grow 2.3 percent next year.
“There are fundamentals that would support the Swedish environment,” Heemskerk said. “But at the same time, we have to be careful with an assessment when debt and house prices continue to increase.”
The Riksbank estimates Swedish household debt will swell to a record 177 percent of disposable incomes by the first quarter of 2015 from 174 percent today. Apartment prices have jumped 11 percent in the past 12 months; prices in downtown Stockholm have surged 35 percent since early 2009.
While the FSA in Denmark is trying to calibrate oversight to avoid stalling a recovery, regulators elsewhere in Scandinavia can do more to avert a correction, according to Heemskerk.
“Denmark is in a later stage in its development so there it may be harder for the regulator to take action,” he said. “In Sweden there is more room for the regulator to take further action if they deem that necessary.”
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