lars nyberg : developments in the property market speech by mr lars nyberg, deputy governor of sveriges riksbank, at the seminar on properties, malmo, 2 september 2003. * * * i would like to begin by thanking you for the opportunity to come to malmo and speak about the riksbank's view of developments in the property market. of course, these developments are not only of interest to those of us present today. they are important to all people, as movements in property prices have significance both for the real economy and financial developments in sweden. when property prices rise, we feel more financially secure and increase our consumption, which leads to a rise in employment and growth. we might even borrow a bit more from the bank if we can. normally, there is no harm in this. but there is a limit, of course, to the burden of debt households can bear without giving rise to worrisome risks. should the debt of commercial property companies also swell, it could entail risks for the stability of the entire banking system, a point that was illustrated so well during the crisis at the beginning of the 1990s. on account of this, the riksbank monitors developments in the property market carefully. we usually divide it into two segments, which give rise to different questions and reflections. the first segment is the housing market. since 1997, housing prices have risen by just over 50 per cent, measured in current prices. the price boom has continued in spite of the generally weak economic activity of the last two years. this is a new experience which differs from previous business cycles, when prices have tended to recede during periods of economic decline. similar developments have occurred in other countries, for example in the us, england and holland. the situation could appear worrying, particularly given that the rise in housing prices has been accompanied by an increase in household indebtedness. the upsurge in prices has raised questions about the healthiness of this trend. are the price rises in the swedish housing market the result of a bubble? are the higher levels of household indebtedness sustainable? the riksbank's view is that the current price developments in the housing market do not reflect any speculative expectations of future price rises which would warrant the term “ bubble ”. nor is household indebtedness a bigger problem than usual for this stage of the business cycle. i will explain this in a moment. the other segment is the market for commercial property. here,

close to balance, compared with sustained deficits in the us and sustained surpluses in japan. of course, remaining competitive is a continuous challenge. over the past two decades, as low - cost competitors have emerged elsewhere in the world, the euro area – like other advanced economies – has recorded some decline in export market shares. these losses partly reflect the mechanical effect of the new entrants. nevertheless, the euro area does need to adjust the range of goods, services, sectors and industries in which it specialises. euro area countries have changed their specialisation over the last two decades, but not all did so to the same extent. as a consequence, the specialisation of the euro area as a whole has not changed much. we could have expected that the euro area would have shifted more towards higher quality products and products that are more skill - intensive and capital - intensive. the fact that there has not been more progress overall might reflect structural rigidities that constrain firms ’ ability to adjust rapidly and to make substantial changes in their specialisation – particularly towards high - technology products. in particular, rigidities in the product and labour markets make it difficult for firms to adjust costs and prices to changing conditions. the ability of countries to adopt the appropriate specialisation may also be limited by structural issues related to the quality of education and the incentives for innovation. internal competitiveness the general picture for the external competitiveness of the euro area is positive. but this general picture does not necessarily hold for each member of the euro area. overall, looking at competitiveness within the euro area, there have been substantial differences across countries. indeed, the strains in some sovereign debt markets have been compounded by the severe competitiveness differentials that have emerged within the euro area. a convenient way to identify competitiveness differentials is simply to look at the current account balances of each country. current account imbalances could be justified for any country, including those participating in a monetary union, and they do not necessarily reflect a loss of competitiveness. but increasingly, larger current account deficits have resulted from significant losses of national competitiveness, signalling domestic macroeconomic imbalances and deeper structural bis central bankers ’ speeches problems. these losses of competitiveness limit the country ’ s growth potential and hinder its participation in the global trade integration. against this background, rather than financing productive investment in the tradable sector and fostering export performance, capital inflows in some countries with excessive current account deficits