Historically, central banks throughout Europe had one mandate: price stability. They did not worry about employment or economic growth, only currency integrity. Setting interest rates to contain inflation ensured that a Krone, Euro or Dollar would purchase tomorrow what it could today. Historically, the banks added interest to idle savings to uphold that principle. Nevertheless, since the ebbing of the 2008 financial crisis, The European Central Bank, which Finland is a member, officially added full employment and economic growth to their mandate. The Norwegian, Swedish and Danish Central Bank’s followed suit, stating that they would consider “other factors” than inflation when basing an interest rate decision.
Hence, instead of remaining impartial, leaving it to lawmakers, markets, and the public to deal with the prevailing interest rate, the central banks inadvertently became involved in policy making. Adding employment and economic growth to their mandate equates to the National Institute of Standards (NIST) changing the definition of the meter to help an engineering firm, working on a major bridge project, meet budgetary and timeline constraints. In addition to creating a dilemma, the additional mandates made central banks appear politically biased.
In an attempt to balance, what central bankers perceive as two opposing forces, inflation and unemployment, they chose economic stability over maintaining price stability. The other option, raising rates would have led to greater short-term unemployment. The central banks pushed benchmark rates all the way down, nearing zero in Norway (.5% – Key Policy Rate ) and Denmark (.05% – Discount Rate), hitting it in Finland (ECB at 0% – Refi Rate) and going negative in Sweden (-.5% – Repo Rate). Note that deposit rates are even lower, forcing money out of the banks and into the economy, stoking inflation. Currently, the real interest rates, which consider inflation, are negative for all the Nordic countries.
Source: Central Bank Websites.
Although the policy mostly kept unemployment at bay, relative to historical levels in the respective countries: currently at 4.4% in Norway, 7.3% in Sweden, 4.2% in Denmark and 9.2% in Finland, it inflated a housing bubble. In Norway and Sweden, where real interest rates (Key Rate – Inflation) are especially negative (-2.30 and -1.90 respectively), housing prices inflated the most. In Oslo and Stockholm, the trend continues.
Wage vs. Housing Price Growth
From 2007-2016, professional wages grew, in local currency, 40% in Norway, 32% in Finland, 25% in Sweden and 24% in Denmark. During roughly the same period, flat price, in local currency and on a per square meter basis, surged 107% in Stockholm, 93% in Oslo and 38% in Helsinki. Copenhagen area, overall, only went up 8% during the same period. However, in recent years, they experienced a surge as well.
Taking the difference, housing price rise – wage increases, discounting salary hikes, we can see that housing increased 82% in Stockholm, 53% in Norway and 6% in Finland. In Denmark, wage growth outpaced housing by 16% in the same period. The chart below, taken directly from the Norwegian State Budget, further illustrates the Nordic housing markets compared to other major western markets. Using indexes and accounting for the whole country, we clearly see that Norway is lifting-off and Sweden is going parabolic.
Finland and Denmark, the Nordic countries with the least negative rates, experienced the least housing price growth. Furthermore, wage growth did not keep up with housing prices, (except in Denmark), further illustrating that negative rate policy, in general, which intends to go all out for growth, does not adequately stimulate the economy – promoting sustainable growth across all sectors.
The Nordic case clearly illustrates that Central banks should only maintain price stability which upholds currency integrity. The rates, when correctly managed, act as a regulator, ensuring the economy remains diversified. No one sector can take all the growth. The “negative (real and deposit) interest rate” experiments are failing, distorting the economies which undertook them. Housing costs are aggravating inequality and depriving other sectors in the economy. For example, retail sales in Norway grew only 8% despite a brisk population increase (up 11% since 2007) and expanding consumer credit (up 13% since 2007) during the past decade.
Sweden and Norway are already deep into the bubble; housing continues to outrun inflation and wages at an alarming rate. Helsinki outpaces the rest of Finland but remains in check due to unprecedented construction. Although Denmark appears to have escaped, recent developments suggest a bubble is on the way. Despite the figures and bubble narrative, the Nordic central banks seem to have little appetite, to curtail rates, favoring growth and full employment. Nevertheless, they will have to rein inflation in at some point, raising rates. To mitigate a potential crash, we can expect to see the introduction and more widespread availability of longer-term mortgages: 40, 50 and even 100 years. (Sweden and Japan already have 100-year intergenerational mortgages.)