Is Swedish Household Debt Too High? Evidence of Stability and Robust Safeguards

Lars E.O. Svensson's analysis concludes that Swedish household debt, while high, poses no threat to financial or macroeconomic stability due to robust household balance sheets, prudent regulation, and a resilient financial system. Effective policies and high net wealth ensure households can manage debt sustainably.

Lars E.O. Svensson, associated with the National Bureau of Economic Research (NBER) and the Stockholm School of Economics, examines the widely debated question of whether Swedish household debt is excessively high and poses risks to financial or macroeconomic stability. Focusing on approximately 80% of household debt tied to mortgages, Svensson evaluates solvency, liquidity, and debt-financed overconsumption to determine the potential for systemic threats. Despite concerns from authorities like the Swedish Financial Supervisory Authority (FI) and the Riksbank, as well as international organizations, the study concludes that Swedish household debt, while high, does not currently threaten financial or macroeconomic stability. Svensson attributes this to robust household balance sheets, effective regulatory oversight, and resilient financial structures.

Household Solvency and the Role of Assets

Swedish households demonstrate strong solvency, with aggregate assets significantly exceeding liabilities. Since 1985, household net wealth has grown faster than debt, with net assets now more than five times the level of debt. By 2024, 78% of borrowers had home equity exceeding 30%, ensuring a buffer against even the largest housing price drops observed in the last fifty years. Loan-to-value (LTV) ratios also highlight this stability: only 22% of borrowers and 15% of owner-occupiers have LTV ratios above 70%. Moreover, Swedish homes are undervalued by approximately 20% based on a user-cost-to-income analysis, indicating that housing markets are sound and far from a solvency crisis. Svensson emphasizes the importance of analyzing the full balance sheet, noting that a focus solely on debt-to-income ratios gives an incomplete and overly negative picture.

How Liquidity Enhances Stability

Liquidity, or the ability of households to meet debt payments, is another crucial factor in determining the risks of high household debt. While debt-to-income ratios have risen, interest payments as a share of income remain manageable, with after-tax interest-to-income ratios at historical lows until 2022 and only modestly increasing thereafter. The Riksbank’s monetary policy, which aligns interest rate adjustments with macroeconomic conditions, provides a form of insurance against downturns by reducing debt-servicing costs during economic slumps. For new borrowers, stringent affordability tests ensure the ability to manage mortgage rates of 6–7%. While mandatory amortization requirements impose additional repayment burdens, most borrowers meet these obligations without difficulty. Svensson finds that owner-occupiers, who benefit from years of housing price increases, have lower debt-servicing burdens, further reducing the risk of liquidity constraints.

Debunking the Myth of Debt-Financed Overconsumption

Concerns that Swedish households engage in unsustainable, debt-financed consumption are unfounded. Indicators such as the high saving rate, normal durable goods consumption levels, and restrained home-equity withdrawals (HEWs) suggest no evidence of over-leveraged spending. HEWs, a mechanism through which homeowners borrow against property value increases, remain modest and are well-regulated. A survey revealed that only 7% of mortgage holders, or approximately 2.8% of Swedish households, used HEWs for non-housing consumption in the last five years. This finding is supported by Sweden’s historical high saving rates, in sharp contrast to the 1990s banking crisis, where overspending fueled instability. Svensson concludes that the risks of debt-financed overconsumption are negligible and that macroprudential policies, including stricter HEW regulations if needed, further mitigate such risks.

Structural and Regulatory Safeguards

Two key structural features of Sweden’s housing and mortgage markets strengthen financial resilience. Swedish mortgages are a low-risk, stable source of income for banks, with negligible credit losses even during economic downturns. Banks maintain stringent lending criteria, and full recourse loans ensure borrowers prioritize mortgage payments. Additionally, the prevalence of variable-rate mortgages creates a robust link between central bank policy rates and household debt-servicing costs, allowing the Riksbank to adjust monetary policy efficiently in response to economic fluctuations. Svensson highlights that this mechanism contrasts with fixed-rate systems in other countries, which delay monetary policy effects. Effective regulation further enhances stability, with amortization requirements ensuring disciplined repayment while macroprudential tools allow adjustments to lending and borrowing practices when necessary.

Concluding a Stable Outlook

International comparisons show that Sweden’s household debt levels, while high, do not stand out among comparable advanced economies. Although the debt-to-income ratio has increased since the mid-1990s, this trend mirrors developments in countries like Denmark, Norway, and the Netherlands. More importantly, household assets and net wealth have grown faster than debt, demonstrating the robustness of Swedish balance sheets. Svensson argues that assessing debt levels without considering asset growth presents a misleading narrative. Ultimately, none of the three key conditions that could threaten financial stability low solvency, inadequate liquidity, or macroeconomic overconsumption are currently present in Sweden. Strong household balance sheets, prudent regulation, and responsive monetary policy ensure that Swedish household debt does not pose systemic risks. The findings offer a reassuring outlook for Sweden’s financial system, highlighting its resilience and ability to weather potential shocks.