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Swedish households: Wealthy but vulnerable

Swedish households: Wealthy but vulnerable

Swedish household debt has grown faster than income for many years. Household indebtedness is at a record high relative to disposable income but historically low compared to household assets. Regardless of the metrics applied, households’ interest rate sensitivity has increased.

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Economic Outlook September 2021 cover image showing a butterflyHousehold debt as a percentage of disposable income has more than doubled since the end of the 1990s. During the same period, the debt service ratio, i.e. interest payments as a share of disposable income, has decreased to historically low levels. The main reason is declining interest rates over the past 30 years. For instance, the 2-year nominal fixed mortgage rate was 14% in the early 1990s but has since plunged to 1.3%.

The Swedish economy has recovered swiftly from the pandemic, and interest rates seem to have bottomed, although a repo rate hike from the Riksbank may still be a long way off. Growing indebtedness means higher interest costs at any given interest rate level, and even minor rate increases may therefore have a large impact at today’s debt levels. This means elevated risks in the housing market as the debt service ratio and housing prices usually correlate. According to our calculations, an increase in interest rates of 1% point would push the debt service ratio 2% points higher. If interest rates were to double from current levels, household debt would have to decrease by half in order to maintain the same level of consumption as today. Expansionary fiscal and monetary policy at an unprecedented scale appears to have boosted credit growth to record-high levels.  Thus, there is a significant risk that the gap between debt and income growth will continue to widen.

The average disposable income for a household with two adults that takes up a new mortgage in Sweden is SEK 59,000 per month and the average mortgage is SEK 3m (Bolåneundersökningen 2021, FI). For this average household, a doubled interest rate from today’s level of 1.4% implies increased debt costs of almost SEK 30,000 per year. That corresponds to an increase in the debt service ratio to 8% from 4%. Although many households are able to handle higher interest costs in the future, the economy may be adversely affected in other ways by for example a drop in consumption or housing prices.

graph: A / Debt at record high but interest expenses at record low

Monetary policy will remain accommodative despite a strong economy. Credit growth is thus likely to remain at high levels.

Gustav Helgesson, Analyst

The situation appears less dramatic when comparing households’ debt to their assets. By this measure indebtedness is instead historically low. This is largely a result of recent years’ gains in the stock and housing markets. From a cash flow perspective, however, it is more interesting to compare households’ debt with their liquid assets such as their holdings of listed shares, funds and bank deposits. By this measure, the ratio of debt to liquid assets fell to 88% during Q1 2021. Although aggregate household asset wealth is substantial, it does not paint a comprehensive picture of household resilience. About 60% of the liquid assets consist of holdings in shares and funds, which could lose value in the event of an economic downturn.

Furthermore, estimates from the Swedish Financial Supervisory Authority suggest that the distribution of household assets is very uneven. One third of the households only have enough liquid assets to cover four months’ loss of income. One ninth of mortgage borrowers now have a debt level of over 450% of their gross income, highlighting their vulnerability to rising interest rates.

All in all, we believe that households’ financial situation is currently strong, but that their interest rate sensitivity is significant. The pandemic and expansionary economic policy have boosted housing prices and credit growth, and monetary policy is likely to remain accommodative for the foreseeable future. This creates an environment with continued high credit growth and rising asset prices. Experiences from earlier crises tell us that the cost of a credit and real estate crisis is very high. The reintroduction of the amortisation requirement could dampen credit growth in the short term but additional measures are needed to reduce the vulnerability of the Swedish economy the day that interest rates eventually increase.

This article originally appeared in the Nordea Economic Outlook: A new phase, published on 1 September 2021.

Read the in-depth article on Nordea Corporate.


Gustav Helgesson, Analyst

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