. in the long run, a rise in property prices should be accompanied by an increase in rental income, since rental income is the underlying return on property investment. the situation today differs considerably from the conditions seen at the time of the property crisis in the early 1990s, when property prices had risen rapidly over a long period without any corresponding upswing in rental income. at that time the price increases were driven instead by expectations that prices would continue to rise strongly in the future. when it eventually became evident that these expectations were not going to materialise, the prices fell quickly. such speculative elements do not appear to exist today. at the same time, property companies ’ earnings and debt - servicing ability are good. as things stand today, the property sector will hardly cause any large loan losses for the banks and so it does not constitute a threat either to the stability of the financial system. housing prices and household debt over the past one to two years we in the riksbank ’ s executive board have devoted quite a bit of attention to the house market, where a rapid rise in prices has gone hand in hand with an increase in household debt. but it is important to distinguish between the conclusions we have come to regarding 1 / 6 the significance for financial stability and the discussions we have had in connection with our monetary policy decisions. i will come back to this. that house prices have risen rapidly in sweden and many other countries can hardly have escaped anyone ’ s attention. in sweden, house prices in the past ten years have more than doubled, and the upswing has been especially strong in metropolitan areas. increasing house prices have been accompanied by an accumulation of household debt. due to the fall in interest rates, households ’ interest costs have dropped, despite the rise in debt. in historical terms, households ’ interest costs are currently very low. that the low interest rates have increased households ’ ability to take on bigger loans is one cause of the upturn in house prices. during the summer and autumn, the rate of increase in house prices appears to have been dampened somewhat in certain areas, but the rate of increase is still high. monthly data show that the annual rate of growth for the whole country during the period july to september was 10 per cent. the developments in sweden are by no means exceptional. internationally, there are examples of countries which have seen sharper rises in house prices, such as australia and the uk. but there are also examples of countries where the rate of increase has been lower, such

, achieving fiscal sustainability, and rebuilding a sound, domestically oriented financial sector. comprehensive capital controls were a key element in the programme. the recession that followed was the deepest in post - war history, with gdp falling by 12 % from peak to trough and unemployment soaring from around 2 % pre - crisis to a peak of 8 – 9 %. the exchange rate fell by over 50 % in 2008, taking the real rate to around 30 % below its long - term historical average. that helped turn the huge current account deficit around to an underlying surplus but wreaked havoc on domestic demand and balance sheets, as ⅔ of corporate debt and 20 % of household debt was in foreign currency, and an additional ¾ of household debt was indexed to the price level. but the policy measures were successful in turning the situation around : the exchange rate stabilised in 2009, fiscal consolidation progressed from 2010 onwards, growth resumed in the second half of 2010, the sovereign regained foreign capital market access in summer 2011, and the new banks were profitable and well capitalised. on the other hand, private sector debt restructuring has proven more time - consuming than originally hoped, and lifting the capital controls is a challenging task. according to the latest figures, iceland ’ s growth rate is 4. 5 % and the unemployment rate has fallen to the 5½ – 6 % range. what lessons can be drawn from this story? 1. excessive and volatile capital flows played an important role in iceland ’ s crisis, and the capital controls and the underlying balance of payments problem are a legacy of that. 2. to a significant degree, the euro area crisis is also a capital flow – balance of payments problem. 3. the framework for cross - border banking in the eu is deeply flawed. either there will be a regression of financial globalisation at the eu level, or the freedoms must be matched by public frameworks and policies. 4. in the absence of international or eu - wide reforms, small, open economies like iceland might have to take action to protect themselves, such as restricting the international activities of home banks and placing much more stringent prudential limits on foreign currency maturity mismatches and foreign currency lending. 5. an independent flexible currency is a double - edged sword. in iceland ’ s case, it was both part of the problem and part of the solution. 6. we need to think of ways to protect the sovereign from failing banks. bailing out bondholders is probably not always the best policy. 7. finally