Swedish repay their mortgages so slowly that it will take 140 years on average, according to the IMF.
The International Monetary Fund lamented Friday that Swedish households pay their mortgages so slowly that they are planning to do an average of 140 years.Why bother paying anything at all? Yet think of the consequences of underwater mortgages on the banking system when an estate does not have enough money to repay loans. A housing bust will have enormous consequences in such a setup.
"Financial stability is [...] reinforced by a steady reduction in repayment schedules - that exceed an average of 140 years," the IMF said in a statement after a mission in Sweden.
This statistic was revealed in March by a government agency, the inspection of the financial sector. It covers loans considered relatively safe, those where the real estate buyer had an initial contribution equal to or greater than 25% of the value of the property and pay the higher monthly interest alone.
According to the Washington-based institution, the Swedish real estate market is a major risk to the economy, along with the eurozone crisis.
"With household debt rising beyond 1.7 times disposable income, a sudden and significant drop in property prices could have an effect on consumption and banks, raising unemployment and further reduce the inflation, and increased the number of non-performing loans and financing costs for banks, "said the IMF.
Swedish Central Bank Ponders New Rules
Sweden is in the midst of a property bubble and a debt bubble, so much so that the risk mentioned above was noticed by the Swedish central bank.
And central banks are always at the tail end of noticing risks of the policies they sponsor.
Please consider Swedes' high debts spark housing bubble fears.
Martin Andersson, the head of Sweden's Financial Supervisory Authority (Finansinspektionen), expressed his concern about Swedes' mounting debts. “Swedish households today are among the most indebted in Europe and we cannot have household lending that spirals out of control,” Andersson said.Sweden Housing Crash Coming Up
One tool already in place to dampen the growth of Swedish household debt is a mortgage lending ceiling introduced in 2010 which caps the amount home buyers can borrow at 85 percent of the value of the property.
Riksbank head Stefan Ingves has also suggested new rules that would require Swedes to pay down the principal on their mortgages, although Andersson refused to say whether his agency would consider such a rule.
Last year, Swedes' household debt hit a record 173 percent of disposable income, well above the 135 percent level during the height of Sweden's banking crisis in the early 1990s.
By the time central banks notice bubbles and begin to discuss ways to alleviate them, it is far, far too late to do anything about them. A housing crash with huge consequences is 100% certain.
The longer it takes before the crash begins, the worse the crash.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
