Property prices have risen recently, and in particular the prices of residential property in metropolitan regions. In contrast to the 1980s, we do not see the same broad price increase across the whole of Sweden, as was the case then. Likewise, the causes of the rising prices appear to be low interest rates, a high rate of new occupancies and low construction activity rather than speculation. This indicates that there are currently no major risks of a fall in residential property prices. However, there is every cause to observe developments carefully. New construction always takes place with a considerable time lag and experience shows that many projects are not ready and do not come onto the market until after a turning point has occurred, at which point things can quickly deteriorate. With regard to commercial property, the development has been more moderate. Again, it is mainly in the metropolitan areas that prices have risen due to high demand. The level of new construction continues to be low and most premises today are already leased before building commences. One way of analysing the extent to which speculative tendencies are inherent in property prices is to place the direct yield in relation to risk-free interest.2 At the end of the 1980s, the risk-free interest rate was considerably higher than the direct yield on properties, which suggests that people bought properties on the expectation of future price rises and/or significant rent increases. Today, the situation is different. Direct yield levels appear reasonable in relation to risk-free interest.

However, the common key success to all these strategies is investment. Increasing and improving physical and human capital is vital for ensuring and fostering opportunities in the future period of growth. And foreign direct investment will continue to be a significant source of knowledge and technology transfers as well as productivity improvement. Yet for businesses to make long-term investment commitments, it is necessary that economic fundamentals be conducive. This is where policymakers can help encourage investment expansion and, in the purview of the central bank, this means finding appropriate ways to mitigate risks to economic and financial stability. As all of us are aware, the main risk at present can arise from massive capital inflows from outside Asia and potential abrupt reversals as a result of the divergence in economic growth between the advanced economies and emerging Asia. While the growth outlook for Asia is positive, there are still significant risks to the recovery in the US, the Euro area, and Japan, including unemployment, high public debt, and the housing slump. In these countries, policies continue to focus on shoring up their recovery and strengthening their own momentum of growth, with monetary policy remaining loose. This is in stark contrast to Asia’s emerging markets, where the threat of inflation is real and present in the near term. Inflation is expected to rise, given rising costs and rising demand, allowing producers to pass on cost increases to consumers. In addition, rising demand from emerging markets can potentially further push up commodity prices and inflation expectations.