lars nyberg : the riksbank and the property market speech by mr lars nyberg, deputy governor of the sveriges riksbank, at a lunch meeting, arranged by connect skane, kristianstad, 6 november 2006. * * * to begin with, i should like to thank you for the invitation to come here to kristianstad to speak about developments in the property market. this is a subject that certainly engages people, not merely us economists but also people who are not usually interested in economics or what the riksbank does. the main interest is probably due to a house purchase being the largest individual investment most of us make in our lives. the riksbank ’ s interest in the property market is based on the two tasks we have been set by the riksdag ( the swedish parliament ). one is to ensure that inflation remains at two per cent a year, with a tolerated deviation interval of plus / minus one percentage point. the other task is to " promote a safe and efficient payment system ”, as it says in the text of the law. we wish to avoid the type of catastrophe sweden experienced during the bank crisis at the beginning of the 1990s and we usually call this safeguarding financial stability. as i shall discuss a little later, developments in the property market can be significant for both these tasks and this is the reason for our interest. i will start by discussing issues of financial stability, but at the end i will also talk about questions concerning the inflation target. the property market consists of two markets ; a market for commercial property and a market for houses and tenant - owned apartments. i intend to begin by discussing the commercial property market. commercial property the commercial property market has in important link to financial stability. the reason for this is that property companies are the largest individual borrowers from the banks, which in turn play a central role in the financial system. approximately 20 per cent of the four major banks ’ lending to the swedish non - bank public is to property management companies. if property management companies experience payment problems, this could have serious effects on the banking system in the form of loan losses, like those we experienced at the beginning of the 1990s ( figure 1 ). experiences have shown that financial crises often stem from property companies with substantial loans and a stock of commercial property. the high exposure and the fact that property is often used as collateral for loans justify regular analyses of the property sector by the riksbank. these analyses focus on the

the exchange rate have also influenced inflation outcomes over recent years. in particular, the trend appreciation of the australian dollar from 2002 has helped hold down the prices of many imported manufactured goods. for example, the price index for household electrical appliances is 8 per cent lower than it was nine years ago. over this same period, clothing prices have fallen 10 per cent, the price of shoes by 13 per cent and the price of manchester by 24 per cent. these are all large price declines. around the trend appreciation of the exchange rate there have, however, been significant swings. in particular, the large depreciation of the currency as a result of the financial crisis saw the prices of many manufactured goods increase in 2009. these increases slowed the moderation in underlying inflation during this period. more recently, the subsequent appreciation of the currency has led to quite large falls in the prices of many manufactured goods. overall though, these swings in the exchange rate have played only a relatively minor role in explaining the recent cycle in underlying inflation which has been primarily driven by domestic factors. some lessons so to summarise, an important lesson from this recent experience is that inflation responds to the changing pressures on capacity in the economy. when demand is high relative to the economy ’ s capacity to produce goods and services, the cost of labour and raw materials tend to rise and firms ’ mark - ups tend to increase. conversely, when demand is low relative to the economy ’ s capacity to produce goods and services, these pressures ease and inflation tends to fall. it is also clear that the dynamics of the recent cycle in inflation were influenced by capacity pressures in the housing market and by developments in utilities prices. they were also influenced by capacity pressures in the global markets for commodities. but these factors alone fall well short of fully explaining the cycle, with the upward pressure on prices in 2008 being very widespread. at that time, around three - quarters of the 90 individual items in the cpi were increasing at faster than their average rate of the previous two decades ( graph 9 ). bis central bankers ’ speeches similarly, the deceleration of inflation since september 2008 has been widespread, with the prices of relatively few items currently increasing at faster than their average rate. graph 9 looking at the experience over the past six years as a whole, it is clear that the protracted period of above - average growth in unit labour costs did eventually lead to higher inflation and this was compounded by a variety of other capacity pressures in the economy. subsequently, the