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Swedish Housing Credit Guarantee Board wants tougher requirements on real estate borrowers

Wednesday, 26 October 2011
An overvalued housing market one of the factors responsible for the financial crisis which sparked what we are still grappling with. To avoid a similar crisis in the system in the future, regulations and practices must be adapted such that creditors and households seize their heavy reliance on short term operations, writes the Swedish National Housing Credit Guarantee Board, BKN, which is a government agency under the Ministry of Health and Social Affairs in a new report.

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According to NBK, the financial crisis which largely originated in the overvalued housing markets has proven to be very costly. To avoid a similar crisis in the system in the future, we should bear in mind that lenders and households often operate short-term and adapt practices and regulations for this.

The combination of low interest rates, low down payment requirements, interest-only loans, and valuations has pushed households into debt too much debts, according to BKN.

BKN has analyzed developments in Denmark, USA and Sweden and concludes that majority of price increases in housing markets can be explained by the transition to floating rates and interest-only loans in the years before the crisis.

Bank credit has been too short-sighted and dangerous. The quest for short-term returns have led to that the equity capital has been lost and that the taxpayer has in many countries end up bearing a large share of the costs write BKN.

The report shows that the costs are large when housing prices fall and households are highly indebted. Against this background, it is worrying that Swedish households continue to increase their mortgage from an already high level.

The average loan to value ratio of mortgages in Sweden is about 65 percent and about 78 percent of new lending. In order to avoid future crises, the requirements for down payment and mortgage payments should increase compared to today, and an enhanced surveillance by the authorities of asset prices and household debt is necessary.

The recipe to avoid over-indebtedness is to strengthen the self-payment and to recover amortization culture, writes BKN.

If households repay their loans even at a lower rates, it means that in total borrowings are both old and largely lowly amortised loans. This would mean that no households are affected if housing prices fall.

BKN also want to see an independent institute that monitors debt and house prices and that is to warn when there is danger to be expected in the future.
By Scancomark.se Team




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