The nub of the household indebtedness, and its association to the housing market, from a Swedish point of view

Sammanfattning: The debt to disposable income ratio of Swedish households has the past thirty years increased radically and mortgages cover eighty percent of household’s financial liabilities. According to the Life-cycle hypothesis, households maintain a steady consumption throughout their lifetime by accumulating mortgages in early ages with the aim to repay their debts when their economy becomes stronger as they become older. This paper aims to investigate what factors drive Swedish households to borrow and increase their debts and debt ratios, and whether the main impact on household debts is the house prices that have increased radically as well. This is done by estimating several econometric regressions and analysing variables such as; housing price index (HPI), interest rate (IR), debt to assets (DA), and squared mean age (AGE2) to see how the variables affect the dependent variable - debt to disposable income (DDI). The results show that housing prices have a strong positive impact on the dependent variable in the long-run. In fact, all variables are significant in the long-run except for interest rate (IR) which is a short-run coefficient. Thus, affecting household debt and the housing market in the short-run.