Stefan Ingves: The housing market and household indebtedness from a
central bank perspective
Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank and Chairman of the Basel
Committee on Banking Supervision, at SNS (Centre for Business and Policy Studies),
Stockholm, 19 November 2015.
* * *
Why are the housing market and household indebtedness important to the Riksbank?
As you have no doubt noticed, the Swedish housing market and Swedish household
indebtedness are being widely discussed. In my speech today, I intend to discuss this matter
from a central bank perspective. Why is it so important for us at the Riksbank?
In this context, it is important to remind ourselves of our role in the Swedish economy. Under
the law, the Riksbank has two main tasks: price stability and financial stability.1 My opinion is
that the housing market and household indebtedness may have great significance for our
chances of performing both of these tasks. And consequently, as I see it, it is self-evident
that the Riksbank should be interested in these issues.
In my speech today, I would particularly like to point out two important conditions for Sweden
regarding monetary policy, price stability and financial stability.
As regards monetary policy, we need to take account of monetary policy abroad. If monetary
policy abroad becomes more expansionary and Swedish monetary policy is passive, the
exchange rate will strengthen and inflation in Sweden will fall. As international monetary
policy is presently very expansionary, we also need to conduct an expansionary monetary in
Sweden so that inflation does not become too low. However, a more expansionary monetary
policy contributes towards households' debts increasing, and this increases the risks for the
Swedish economy as a whole and the risks for financial stability.
Financial stability in Sweden is affected by the banks, to a large extent, obtaining funding for
households' mortgages on the market, largely in the form of what are known as covered
bonds. These bonds have come to form the linchpin of the Swedish financial system: the
value of the bonds corresponds to over half of Sweden's GDP. Foreign investors own a large
proportion of these bonds. Swedish banks' funding is therefore dependent upon both
Swedish and foreign investors having confidence in the Swedish housing market.
Let me now go on to talk first about our monetary policy and the significance of the housing
market and household indebtedness for interest rate decisions, then describe the risks and
finally discuss the tools for managing these risks.
Why is monetary policy so expansionary?
Sweden is a small, open economy that is affected to a large extent by events abroad. The
euro area, which represents about half of our foreign trade, is particularly significant.2 As you
know, the global financial crisis of 2008 was followed by a sovereign debt crisis in the euro
area a few years later. Developments in recent years have therefore entailed an
unexpectedly weak level of economic activity abroad, and this has had consequences for
Swedish inflation and the real economy. In conjunction with this, inflation also became
surprisingly low both in Sweden and abroad. Long-term inflation expectations in Sweden
started to fall - the credibility of the inflation target thereby risked being undermined (see
Figure 1).
Figure 1
Inflation expectations among money market participants
Per cent
Source: TNS Sifo Prospera.
Monetary policy abroad affects the conditions for Sweden
Sweden is a small, open economy, which is reflected, not least, by its monetary policy.
Interest rates abroad are an important condition for Swedish monetary policy. As I have
pointed out on previous occasions, there is a very high correlation between Sweden and the
rest of the world regarding inflation, GDP and interest rates.3 When the euro area conducts a
highly expansionary monetary policy, this affects us. I am thinking not just of the level of the
policy rate but also of the ECB's comprehensive asset purchases, which are also intended to
push down the interest rate level in the euro area (see Figures 2 and 3). Everything else
being equal, lower interest rates abroad lead to a stronger krona and lower inflation in
Sweden via lower import prices.
Figure 2
Policy rates in Sweden and the euro area
Per cent
Sources: ECB and the Riksbank.
Figure 3
Central banks' balance sheet totals
Per cent of GDP
Sources: ECB, Eurostat, Statistics Sweden and the Riksbank.
Several other small, open economies, such as Switzerland, the Czech Republic and
Denmark, have also been affected by the ECB's expansionary monetary policy, even though
their conditions are slightly different from those in Sweden, not least as regards their
monetary policy regimes. However, the problem is fundamentally the same, namely that the
expansionary monetary policy in the euro area is creating pressure on these countries' own
currencies to appreciate.
Monetary policy is a matter of trade-offs
Last year, we cut the repo rate to zero in Sweden, and we have continued to lower it below
zero at the same time as we have purchased government bonds (see Figure 4). We did this
to safeguard confidence in the inflation target. If we can get inflation to rise, this will reduce
the risk of the inflation target's role as nominal anchor being undermined.
Figure 4
The Riksbank's purchases of government bonds and the repo rate
SEK billion and per cent
Source: The Riksbank.
According to our analysis, the purchases of government bonds have contributed to interest
rates in Sweden being lower and the krona being weaker than would otherwise have been
the case without the purchases.4 We are now also seeing that inflation is moving in the right
direction (see Figure 5).
Figure 5
Inflation in Sweden
Annual percentage change
Note. The CPIF is the CPI with a fixed mortgage rate.
Source: Statistics Sweden.
However, we are very much aware that the low interest rate level is also increasing the risks
linked to households' already-high indebtedness. We are now seeing annual rates of
increase in housing prices of between 15 and 20 per cent, at the same time as household
indebtedness has started to accelerate upwards again (see Figure 6).5 There is a connection
between the development of housing prices and household indebtedness because housing
purchases are largely funded by loans and large parts of households' debts are made up of
mortgages.
Monetary policy faces a choice between, on one hand, the development of the exchange
rate, inflation and inflation expectations and, on the other, the development of household
indebtedness.
My assessment is that, at present, it would be difficult to maintain a higher repo rate to
manage the risks linked with household indebtedness. The krona would then risk
appreciating and demand in Sweden could become too low - inflation may not reach the
target as planned and inflation expectations may not become anchored around the target.
Figure 6
Housing prices and household indebtedness in Sweden
Sources: Statistics Sweden and Valueguard.
The expansionary monetary policy is contributing to stable inflation...
Our assessment is that the monetary policy being conducted will allow us to safeguard the
credibility of the inflation target, which is vital for achieving price stability. However,
household indebtedness risks threatening both price stability and financial stability.
You could put it like this: Monetary policy is the policy area that has the best conditions for
influencing the exchange rate and inflation. But to restrain household indebtedness, we
would actually need an "extra policy rate", aimed at households and able to be set at a higher
level than the usual policy rate. However, as the Riksbank can only steer the general level of
interest rates and a part of the transmission is that households borrow more when interest
rates are low, we now have to turn to other policy areas to manage household indebtedness.
... but assumes measures will be taken on the housing market for success in the
longer term
One condition for our monetary policy trade-offs to be successful is for measures against
indebtedness to be taken elsewhere. If this does not happen, we may encounter major
problems later on, both for the economy in general and for monetary policy.
Let us assume that no measures are taken. The housing rally could then potentially continue.
In the worst case, international confidence in the Swedish housing market would start to
collapse. As covered bonds are largely held by foreign investors, we would risk having these
investors remove a large part of the banks' funding, which could have effects not only on
financial stability but also on inflation.
In that case we could describe a very bad scenario: The banks would encounter funding
problems, which in turn would lead to higher lending rates and lower demand. Foreign
investors' reduced confidence in the Swedish housing market would lead to a weakening of
the krona, which could then drive up inflation. Bond yields would rise, and the Riksbank
would likely be forced to raise the policy rate to get inflation down, which would have even
more consequences on household demand, and so on.
We can therefore see that merely the fact that no measures have been adopted could affect
the Riksbank's chances of achieving price stability and financial stability. And this is without
me even mentioning what could happen if households find it difficult to pay their mortgages
and housing prices go into a steep decline.6
A fall in housing prices could snowball, with a number of interacting effects...
A fall in prices on the housing market could threaten both real economic and financial
stability via both direct and indirect effects.
The direct effects on the macroeconomy are linked to reduced consumer demand
High indebtedness makes households sensitive to shocks (such as falls in housing prices
and interest rate increases). Several empirical studies indicate that households with higher
levels of indebtedness reduced their consumption significantly more than less indebted
households during the financial crisis, when housing prices fell substantially in several
countries (see Figure 7).7 Let me explain why this could be the case.
The relationship between indebtedness and the development of
consumption among Danish households during the financial crisis
Per cent
4 4
2 2
0 0
Change in
-2 -2
consumption
between 2007 and
2009, in relation
-4 -4
to income in 2007
-6 -6
-8 -8
-10 -10
0 50 100 150 200 250 300 350 400 450 500 550 600 650 700
Debt-to-income ratio in 2007
Source: Andersen, A.L, Duus C. and Laerkholm Jensen T., "Household debt and
consumption during the financial crisis: Evidence from Danish micro data", Working
Paper, Danmarks Nationalbank.
One hypothesis argues that highly indebted households particularly increased their
indebtedness before the crisis with the aim of increasing consumption, based on, for
example, optimistic expectations. When the crisis hit and the mood changed, these
households radically reduced their consumption back to a more normal level. This has been
highlighted as an explanation for the negative link between indebtedness and consumption
developments among Danish households (see Figure 7).8
Substantial falls in housing prices impact households' balance sheets, in that the relationship
between assets and debts rapidly deteriorates. There were clear signs of this in the countries
in which housing prices fell heavily in conjunction with the financial crisis. For example, over
a short time, the average loan-to-value ratio among US households with mortgages
increased from under 60 per cent to over 90 per cent, while the average loan-to-value ratio
among households in Denmark increased from under 45 per cent to over 60 per cent
(see Figure 8).
Households' loan-to-value ratios in the United States and Denmark
Per cent
Sources: Gelain, P, Lansing, K.J., and Mendicino, C., "House Prices, Credit Growth, and Excess
Volatility: Implications for Monetary and Macroprudential Policy", International Journal of Central
Banking, 2013, and Andersen, A.L, Duus C. and Laerkholm Jensen T., "Household debt and
consumption during the financial crisis: Evidence from Danish micro data", Working Paper,
Danmarks Nationalbank.
When debts take up a larger share of the value of housing, consumer demand decreases.
The most obvious channel is that it will be more difficult to borrow for consumption when the
value of collateral (housing) declines.9 Other channels can also be considered, however,
such as increased saving to restore balance sheets, so that debts decrease in relation to
assets and return to the same proportion as before the fall in prices.
Another channel can be added to this, namely in the form of a fall in housing prices reducing
confidence among households and companies across the board, with a negative impact on
demand in general.
Apart from the consequences for the economy as a whole, we risk seeing many personal
tragedies in connection with individual households running into problems.
The direct effects on financial stability are connected with banks' funding
Perhaps the first aspect to consider regarding the link between financial stability and falling
housing prices is that the banks make loan losses on households' mortgages if housing
prices fall. However, in light both of our experiences from the crisis of the 1990s and the fact
that Swedish mortgage holders have comprehensive obligations to make payments on their
loans (full recourse), this must be considered less likely.10
It is in fact more likely that financial stability risks will arise as a result of the banks' funding
being impaired. Swedish banks have a large share of wholesale funding, with one important
element being covered bonds with mortgages as collateral. These bonds fund lending for
housing purposes and are also reported on the banks' asset side, as the Swedish banks
largely own one another's covered bonds. The banks utilise the bonds in their liquidity
portfolios, in their role as market makers, as collateral in repos, and so on.
In Sweden, the market for covered bonds with mortgages as collateral is currently larger than
the market for Swedish government bonds. The outstanding stock corresponds to over half
of Sweden's GDP. In other words, covered bonds are one of the central linchpins of the
Swedish financial sector.
A large proportion of the covered bonds are held by foreign investors (see Figure 9). The
Swedish banks are therefore dependent on foreign investors' confidence in the Swedish
mortgage market. A fall in housing prices makes it more difficult for the banks to obtain
funding - foreign investors have turned out to be volatile, for example in conjunction with the
last financial crisis (see Figure 9). Sweden has a large banking system, in which the banks'
assets correspond to almost 4 times GDP. The potential effects on the economy are thus
also magnified.
Figure 9
Ownership of Swedish covered bonds by type of investor
Shares in per cent
50 50
45 45
40 40
35 35
30 30
25 25
20 20
15 15
10 10
5 5
0 0
02 04 06 08 10 12 14 16
Swedish banks
Swedish funds
Svenska insurance companies
Public sector including national pension funds
Foreign investors
Source: Statistics Sweden.
Indirect risks for financial stability and the macro economy
An indirect risk, going from the macro economy to financial stability, is that reduced demand
from over-indebted households will push the general level of demand in the economy down.
This will weaken economic activity, in turn increasing the risks that the banks will incur loan
losses in the corporate sector.11
Earlier, I mentioned that the banks may have problems obtaining funding in the event of a fall
in prices on the housing market in Sweden. In such a scenario, it is also conceivable that the
banks' funding problems will lead to higher lending rates to households - and thereby to
lower consumer demand.
In practice, it is likely that all of these direct and indirect factors will interact so that the
consequences of a decline on the housing market may be serious and also difficult to gain an
overview of in advance.
... making it difficult to maintain price stability and financial stability
It is very clear that it will be more difficult for the Riksbank to carry out its main tasks of price
stability and financial stability in the event of a substantial fall in prices on the housing
market.
I shall begin with price stability. If demand grows weakly as a result of a fall in housing prices,
we would normally end up with lower inflation. However, if decreasing confidence in the
Swedish housing market among foreign investors leads to a general fall in interest in
investing in Sweden, we would presumably see a substantial depreciation of the krona,
which could strongly push up inflation. It is very likely that uncertainty over the development
of inflation would increase.
If we go over to financial stability, I can repeat what I have said many times before, which is
that financial stability and price stability are interconnected. One reason for this is that if it
becomes more difficult for the banks to obtain funding, it will also become more difficult to
'reach out' with repo rate changes. We usually describe this as a weakening of the monetary
policy transmission mechanism. And this, naturally, makes it more difficult to stabilise
inflation around the target. The Riksbank would also have to use its various tools to manage
liquidity problems in the banks. We saw this clearly during the acute financial crisis of
2008-2009.
I shall now summarise my comments so far. Our monetary policy strategy is based on using
a highly expansionary monetary policy to safeguard confidence in the inflation target, which
has provided a nominal anchor for the Swedish economy for over 20 years. However, we are
well aware that the low interest rate level increases the risk of problems arising on the
housing market later on and that measures need to be taken elsewhere to make our strategy
successful in the longer term.
Consequently, when we discuss possible measures for the housing market and household
indebtedness, this is a matter of risk management: of adopting measures today to prevent
the risk of unfavourable events later on. When it comes to the exact design of measures, to
some extent it is, therefore, a matter of subjective opinions and not an exact science.
The mandate for macroprudential policy in Sweden must be clarified
Macroprudential policy is the policy area which has come to dominate the international
discussion about reducing risks linked to household indebtedness.12 Several targeted tools
are offered within macroprudential policy which could be used for this purpose. For example,
requirements could be placed on banks' equity by introducing countercyclical capital buffers
and risk-weight floors on mortgages, and limits could be placed on how much households
can borrow by way of loan-to-value limits and an amortisation requirement. It is therefore
obviously very concerning that the previously adopted macroprudential policy framework in
Sweden has encountered legal problems.
We now have a situation whereby a proposal for an amortisation requirement from the
Government has been sent out for consultation after some unclear legal points arose
concerning Finansinspektionen's previous proposal.13 Naturally, it is thus even more
regrettable that uncertainties have arisen surrounding the legal aspects of the Government's
proposal. The current proposal also only deals with the amortisation requirement -
uncertainties remain regarding other loan limitation tools which I consider to be entirely
necessary. More on this in a moment.
The European Systemic Risk Board (ESRB) issued a recommendation in January 2012
concerning the national mandate for macroprudential policy. In this, the importance is
highlighted of the responsible authority having access to appropriate tools to meet its targets.
I can only observe that this recommendation has not been implemented in Sweden.
We propose measures
We at the Riksbank must obviously make a contribution, given our task, and analyse the
risks before issuing a proposal for how they should be managed, not least because financial
stability is a precondition for price stability. Let me begin by discussing different types of
measure more generally, and then I will say a few words on the quantitative effects of
household indebtedness.
Put simply, we can say that there are two different ways to manage the problems on the
housing market: either attempt to increase the housing supply in order to dampen housing
prices, or dampen demand for housing and mortgages by making it more expensive to
borrow, or simply limit how much households can borrow. In terms of measures which
subdue demand, it is important to differentiate between measures which affect all loans, or
the whole stock of credit, and measures which only affect new loans, or the flow of credit. But
let us begin with measures which affect the supply of housing.
An increased supply of housing could dampen price increases - but it would take
time!
Structural problems on the Swedish housing market are the main reason why housing
construction has been unable to meet rising demand. An increased supply of housing is a
central piece of the puzzle, as it can subdue the increase in housing prices, which would also
help to limit household indebtedness.
However, the quantity of housing is not the only significant factor in terms of household
indebtedness. It is also necessary to review how we can exploit the current housing stock
more effectively. The distribution between purchased and rented housing is significant.
Changes in the regulation of the rental market or increased subsidies for rented housing
would increase the share of accommodation to rent, thereby dampening demand for
cooperative housing and thus housing prices.
However, increasing the number of cooperative houses and changing the structure of the
Swedish housing market can take a long time to implement. Over that time we will be obliged
to look at different measures which could dampen demand for housing and mortgages.
Measures which can dampen household demand for mortgages
Raising capital requirements important to reinforce the resilience of banks, although
the effects on household indebtedness are limited
One option is to focus on the banks and raise capital requirements, which I think we should
do. If the banks were forced to change the funding mix on their balance sheets towards a
higher share of equity, lending rates could then increase which would mean lending volumes
would decrease. However, our own analysis suggests that the effects on banks' lending rates
and lending to households would be limited.14 The main effect is in fact that the resilience of
banks is strengthened. But this is a central point seen against the background of financial
stability risks I described earlier.
A large part of the improvement of banks' risk-weighted capital ratios over the last few years
has taken place as a result of banks using internal models to a greater degree to calculate
lending risks, and not by building up more capital. The use of these internal models has
meant that the risk weights on banks' lending have fallen, which has contributed to a rise in
equity in relation to risk-weighted assets. Our analysis shows that without this transition to
internal models, the major banks' core tier one capital ratios would only have increased by a
few percentage points over the period 2006 to 2013. The banks' equity as a proportion of
total assets, or the leverage ratio, has been largely unchanged over the last few years (see
Figure 10).15
Figure 10
The major Swedish banks' core tier one capital ratio and leverage ratio
Per cent
Note. The blue line indicates CET 1 in relation to total assets and
thus differs from the Basel Committee's definition of leverage ratio.
Sources: Banks' annual reports and the Riksbank.
Even though measures have been taken to reinforce banks' capital levels, more is needed.
One important measure for which the Riksbank has argued for a long time is the introduction
of a leverage ratio requirement. But we have also argued in favour of raising the
countercyclical capital buffer to 2.5 per cent along with raising the risk-weight floor for
mortgages to 35 per cent. Although the effects are minor, a raised risk-weight floor for
mortgages has the advantage that it can contribute to higher mortgage rates for households,
and that banks are forced to retain more capital in order to cover their mortgage lending.
Direct loan limitations for households reduce the risks - but only affect new borrowers
One alternative is to focus on households and limit the amount they are able to borrow.
Examples of such measures include debt-to-income limits, loan-to-value limits, an
amortisation requirement and minimum levels for banks' discretionary income calculations.
This affects the flow of credit, or new loans in other words. The effect on the stock of debt
therefore takes time.
It is possible to understand the effects of different types of loan-limiting measures by using a
simple equation which describes the development of the stock of debt over time:
= (1 - αα) ∗ +
DDtt DDtt-1 LLtt,
where is the level of debt stock on date t, αα is the rate of amortisation in the loan stock
DDtt
and are new loans on date t. The development of the debt stock is therefore determined
LLtt
by the rate of amortisation on existing loans and by how many new loans are taken out.
All types of loan limitation discussed so far concern new loans. As loans in the stock are
typically amortised very slowly - by a few per cent each year - the development of the debt
stock will principally be determined by the previous debt stock in the short term. Limiting the
amount of new loans therefore has a relatively slow impact on the debt stock.
A reduction in tax relief on mortgage interest can affect all borrowers - and could have
potentially major effects on indebtedness
To influence the development of household debt we should also consider fiscal policy
measures, which in this context means changes to various housing-related taxes. One
example is changes to tax relief on mortgage interest. The advantage of this kind of
measures is that it has the potential to influence the entire debt stock. The incentive to take
out new loans decreases, and the costs linked to existing loans are also affected. In terms of
the simple debt equation above, the amortisation rate could therefore rise on existing loans
(the incentive to amortise increases if future borrowing costs rise) while new borrowing would
be subdued.
The debt-to-income limit is an effective complement to the loan-to-value limit
There are many indications that the distribution of debt is also significant in terms of risks. As
I mentioned earlier, several international studies show that highly-indebted households
reduce their consumption more than households with lower debts when there is a fall in
housing prices, for example. Measures which set an upper limit for individual household
indebtedness can therefore be effective in terms of reducing the risk of weak macroeconomic
growth, even though the effects of the total debt-to-income ratio would be limited.
The Riksbank's previous analysis has also shown that a debt-to-income limit (that is to say a
limit for how large debt can be in relation to disposable income) could be an effective
complement to the current loan-to-value limit.16 This is due to the fact that incomes grow in a
more stable way than housing prices. Whenever housing prices increase sharply, there is a
risk that debts will continue to increase in relation to incomes if the only limitation is a
loan-tovalue limit. A debt-to-income limit is also more effective in terms of preventing interest
payments taking up too large a share of incomes in the future.
So those are the measures we could take. But what would happen to household
indebtedness if no further measures were taken?
A few different scenarios for household indebtedness
Normally, the Riksbank creates forecasts regarding household indebtedness three years
ahead. Making an assessment any further ahead than this would involve considerable
uncertainty. However, in order to give us an idea about what could happen to household
indebtedness beyond the forecast horizon three years ahead, we have made a rough
estimate of developments over the coming 10 years, which uses our forecast for the coming
three years as a starting point. We assess that the rate of increase of indebtedness will slow
somewhat when the repo rate gradually begins to be raised (according to our forecast for the
first six months of 2017) and slowly rises to a normal level.17
In the Financial Stability Report from the spring, we published an extensive analysis of
Swedish household indebtedness. One conclusion drawn from this was that international
studies and experiences from the Swedish 1990s crisis indicate that if indebtedness
approaches 180-210 per cent, measured as a proportion of disposable income, risks in the
Swedish economy are heightened. This is due to households' interest expenditure - at a high
rate of interest than today's - becoming so high that it could lead to a major fall in demand
and ultimately a crisis.18 It is clear that we are approaching a critical level with leaps and
bounds (see Figure 11).
Figure 11
Household debt as a percentage of disposable income
Per cent
220 220
Scenario without measures
210 210
200 200
190 190
180 180
170 170
160 160
150 150
140 140
130 130
05 10 15 20 25
Note. Broken red line shows an estimate of developments over the
next 10 years without further measures. Shaded area indicates a
feasible lower limit for when the risks are elevated in the economy.
Sources: Statistics Sweden and the Riksbank.
We have also developed examples to broadly assess how different measures influence the
development of household indebtedness, which can then illustrate what is required to help
this indebtedness level out.
Finansinspektionen's proposal in the spring of an amortisation requirement means that new
mortgage borrowers with loan-to-value ratios above 50 per cent must amortise 2 per cent of
the loan per year down to 70 per cent, and then 1 per cent per year down to 50 per cent.
However, we should be clear that this requirement looks mild by international standards. In
most countries, the loan has a clear maturity date, which specifies when the debt is to be
repaid, often between 20 and 40 years, and the proportion of interest-only loans is often
low.19 If the home is not revalued, the Finansinspektionen proposal for an amortisation
requirement means that households with a loan-to-value ratio of 85 per cent would need to
amortise down to a loan-to-value ratio of 50 per cent within 32 years.
We see in Figure 12 that the amortisation requirement, in its present draft form, will have little
impact when it comes to slowing down total indebtedness in the coming years. As I
mentioned, it is the case for all loan-limiting macroprudential policy measures (for example
loan-to-value limits, amortisation requirements and debt-to-income limits) which only affect
new borrowers that they are relatively slow to have an effect on the debt stock. For this
reason, such measures have a minor effect in many cases on total indebtedness over a
10-year period, although the scope of the measure itself (that is to say how many fewer new
loans can be taken out) obviously also plays a part.
Figure 12
The effect of an amortisation requirement on household
indebtedness according to current proposals
Per cent
220 220
Scenario without measures
Amortisation requirements
210 210
200 200
190 190
180 180
170 170
160 160
150 150
140 140
130 130
05 10 15 20 25
Note. Broken red line shows an estimate of developments over the
next 10 years without further measures. Shaded area indicates a
feasible lower limit for when the risks are elevated in the economy.
Broken yellow line shows an estimate of the effect of an amortisation
requirement according to current proposals.
Sources: Statistics Sweden and the Riksbank.
A change to tax relief on mortgage interest could lead to a faster and more direct effect on
household indebtedness, as it affects all borrowers. However, as a reduction in tax relief
initially raises mortgage costs, it is likely that existing mortgage borrowers do not pay down
their loans immediately. The effect on the total debt-to-income ratio therefore occurs
gradually, even in the case of changes to tax relief. According to these calculations, it is only
when tax relief is halved that we will see a clear slowdown of hous