lars nyberg : the mortgage market from a riksbank perspective speech by mr lars nyberg, deputy governor of the sveriges riksbank, at the swedish bankers ’ association ’ s annual bank meeting 2004, stockholm, 11 november 2004. * * * first and foremost, thank you for the invitation to speak at the bank meeting today. the mortgage market is the focus of today ’ s meeting and i will discuss this market from a riksbank perspective. but what is that exactly? the riksbank ’ s remit is to conduct monetary policy in such a way that leads to stable prices, but also to promote stability and efficiency in the payment system. for both of these tasks, the situation in the mortgage market since the mid - 1990s, with increasing household debt and rising housing prices, has been of great interest. is this development sustainable? and if not, what should be done? incidentally, we share these issues with a number of other countries in the western world. i intend to begin with a brief reminder of how we arrived at this situation. then i will discuss the risks to financial stability. finally i will give my views on the possible implications for the inflation target and monetary policy. housing prices and debt since 1996 house prices have risen by just over 80 per cent in current prices. swedish household debt has increased by 85 per cent over the same period ( figure 1 ). household debt in relation to disposable incomes is now at the same level as just before the banking crisis at the beginning of the 1990s, just over 120 per cent. the bulk of households ’ loans have in various ways been secured on homes. a number of factors can help to explain this development. in the housing market the supply of new apartments has been low since 1993 ( figure 2 ). in the centres of the major swedish cities, where prices have risen most, it is difficult to build homes at all. meanwhile, demand has picked up as a result of robust growth in households ’ incomes. disposable incomes have risen by 35 per cent since 1995, measured in current prices. moreover, migration to the big cities has boosted demand in the very areas where the supply is most limited. during the it boom, the demand pressure in stockholm was high, which was reflected in prices. when the equity market and particularly technology companies dropped in value, prices in stockholm stagnated, but they continued to rise in gothenburg and malmo. in the credit market, falling interest rates have

sufficient liquidity of financial institutions and falling trend of money market rates during the first quarter of this year, the pbc intensified sterilization operation. in this period, the cumulative amount of central bill issuance reached rmb 435. 2 billion yuan and outstanding amount stood at rmb 615. 45 billion yuan ; base money injection as a result of forex purchase amounted to rmb 291. 6 billion yuan, and open market operation withdrew rmb 281 billion yuan, resulting in a net base money injection of rmb 10. 6 billion yuan and basically offsetting the forex position of base money. ii. use reserve requirement policy in a flexible way to lower the cost of currency withdraw and improve the operation of commercial banks in order to rein in the obviously excessive credit growth, the pbc raised the required reserve ratio by one pp on september 21, 2003. traditional money and banking theories regard required reserve ratio hike as a relatively drastic measure, nevertheless the central bank interpreted it as a mild move. the major reason is that the central bank has to withdraw a large amount of excess liquidity because of fast growth of foreign exchange reserves, to do so, if the central bank only issue cb bills without any other measure, it has to raise the interest rates on cb bills to a very high level given strong economic expansion momentum and commercial banks ’ wide interest rate differentials which is larger than the returns on cb bills, however, high interest rate would have significant implications on the economy. in contrast, the 1 pp rise of required reserve ratio enabled the central bank to reduced at a lower cost the commercial banks ’ excess reserve by around rmb150 billion yuan, accounting for only 6 % of their holdings of treasury bills, financial bonds and cb bills. therefore, the required reserve ratio hike is actually a mild policy measure. moreover, the policy was announced one month in advance, giving sufficient time for financial institutions to manage their liquidity. the pbc also provided timely support to those financial institutions with short - term liquidity difficulties, so as to maintain the overall stable developments of financial operation and money market interest rates. with the approval of the state council, the pbc announced on march 25, 2004 that the required reserve ratio for financial institutions with capital adequacy ratio below a specific level would rise 0. 5 pp to 7. 5 %, while the ratio for other financial institutions remained unchanged. state - owned commercial banks, urban and rural credit cooperatives were exempt from the differentiated required