The Housing Market and Role of Macroprudential Policy in Sweden

Amanda Ida Maria Svensson Richter & Sara Anna Lovisa Carlson

Student thesis: Master thesis


This thesis is motivated by the recent development in the Swedish housing market; where house prices have appreciated steadily, coupled with a strong increase in household indebtedness. This trend has worried policymakers, as the housing market historically has had adverse consequences for the real economy and financial stability, both in Sweden as well as in other markets. The financial crisis and the ‘lean-clean’ debate have made it relevant to question the appropriateness of monetary policy to address housing market imbalances. This has resulted in a more widespread acceptance and application of a set of alternative instruments, so called macroprudential tools, to more explicitly target imbalances in specific sectors of the economy and the financial market.
A vast number of international studies have investigated the housing market’s transmission mechanism to the real economy, and the empirical support for macroprudential policy has grown gradually stronger over the past decade. However, research in the Swedish context, to examine the empirical performance of the macroprudential measures targeted at house prices and household debt, has been rather limited. Thus, the aim of this thesis is twofold; first, it provides evidence on the housing market’s transmission mechanism to the real economy and financial stability, secondly, it tests the empirical impact from the loan-to-value (LTV) limit and the amortisation requirement.
The first part is supported by an analytical framework building upon intertemporal choice theory, agency theory and the Q-theory of residential investment, which guides the collection of evidence from reports and other researchers’ findings on the housing market’s role in Sweden. The evidence suggests that the growing importance of the housing market, to affect real economic variables and financial stability, largely has been driven by changes in credit market conditions, which has made it easier to extract collateral wealth. This stimulates consumer expenditures, but on the downside also increases the sensitivity of actors in the financial market to the housing cycle. The second part employs a synthetic control method (SCM), to statistically quantify the impact from the credit and housing targeted macroprudential measures taken so far. Furthermore, a Vector Autoregression (VAR) model is used to quantify the impact from monetary policy on house prices. The VAR results are then used to investigate the interaction between monetary and macroprudential policy, by disentangling the policy rate effect from that of the LTV limit. The empirical results suggest that the LTV and the policy rate do mitigate house price growth, while there is no visible effect from the amortisation requirement. The results also indicate that the effect from the intervention fades away over times and that its relative strength varies across regional areas.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2017
Number of pages128
SupervisorsSvend E. Hougaard Jensen