Household debt hampers Swedish economic growth

Over the past thirty years, Sweden has been regarded as a frontrunner of a so-called “balanced growth model”—a strategy that combines strong exports with robust domestic demand. In a study published in Economy and Society, Timothy Blackwell highlights the downside of this model, pointing to the Swedish housing market and high household debt as a risky component of the growth strategy.

For several decades after the Second World War, the Swedish housing model constituted a cornerstone of the Social Democratic welfare state. At its core was a system of extensive state subsidies for housing construction, combined with strict credit and capital controls that reduced risks for financiers, investors, and households alike.

Risk management in Sweden and much of the Western world changed in the 1980s, however, when the financial regulations established after the Second World War were dismantled. As a result, the focus of financial governance shifted from minimising credit risks to stimulating credit growth.

“The outcome was a series of financial crises across the Western world. These crises led to calls for a new and more refined system of economic governance aimed at reducing the risk of future crises and mitigating the effects of demand shocks—particularly in a context where household and corporate debt has increased,” says Timothy Blackwell, Researcher in Political Science at IBF.

Examples include the extraordinary measures taken during the banking crisis of the 1990s and the global financial crisis of the 2000s, when the state effectively assumed credit risk through general bank and deposit guarantees. At the same time, financial governance has evolved and been refined with each crisis. During the COVID-19 pandemic of 2020–2022, the Riksbank purchased such large volumes of covered mortgage bonds that they eventually amounted to almost a quarter of the entire market. Meanwhile, amortisation requirements were temporarily suspended and the cost of mortgage interest tax deductions soared.

Rather than limiting speculative housing markets and controlling credit flows, as in the past, the new regulations came to function as a form of safety net for homeowners and investors within a system characterised by an expanding financial sector. This was achieved, among other things, through tax advantages for owner-occupied housing, the channelling of pension savings into mortgage bonds, low interest rates, and—crucially—reduced liquidity risks through extensive state intervention. The result was a prolonged period of rising house prices and increasing household debt.

“All of this took place at a time when housing construction was at historically low levels. An almost unconstrained supply of credit encountered a housing supply system that was unable to meet rising demand. But even with these supply constraints driving prices higher, the scale and persistence of house price growth over the past three decades would not have been possible without sustained state support for the housing and mortgage markets,” says Timothy Blackwell.

He describes growth driven by high household debt as a double-edged sword—at some point, debts must be repaid. On the surface, the economy may appear stable, but risks are building beneath the surface. As long as economic growth exceeds the growth of debt, imbalances remain hidden. When debt levels become too high, however, the economy risks falling into a debt trap. The recent rapid increases in interest rates have provided a clear preview of this dynamic.

“Sweden’s internationally high level of private debt ties up household and economic resources in ways that hamper long-term growth and crowd out productive investment—particularly in a situation of structurally constrained housing supply,” says Timothy Blackwell.

He argues that the Swedish model of “balanced growth” was successful during a period of globalisation characterised by low inflation and expanding international trade. The problem is that a system built on persistently high private debt and rising asset prices contains inherent vulnerabilities that may become apparent when macroeconomic conditions change—for example, in the event of interest rate hikes, trade wars, or international crises.

“Reforming the housing system so that it better meets people’s needs—by building more homes without crowding out productive capital investment—is one of our most important future challenges and a crucial condition for strengthening Sweden’s resilience in uncertain times,” says Timothy Blackwell.