Valuation and Lending Policies in Germany and Sweden

Purpose - Similar development of economic fundamentals in Germany over the last fifteen years did not lead to dramatic house price increases as in Sweden. What can explain this house price stability over a long period? This paper attempts to find the answer this question. Design/methodology/approach - A comparative analysis approach is used to examine the differences in the banking sector policies on mortgage financing and approaches to valuing the mortgage properties in two case countries – Germany and Sweden. Findings - The extreme rise in Swedish house prices above the long-term trend was created by expanding bank lending policies. Excessive bank lending was not a sole reason for increase in prices, but was supported by the general macroeconomic factors and regulation environment determining supply and demand on the housing market. Banks should implement mortgage lending value as a base for mortgage lending together with amortization requirement for mortgage loans. Lending limits based on mortgage lending value will contribute to the stability in house prices in the long term period and it will create a safe lending environment on the housing market. Originality/value - The paper contributes to a better understanding of necessary conditions for the house prices to rise in the long run above the fundamentals level and suggests policy solutions that can reduce the risks of housing bubbles and increase financial stability.