French rider Olivier Garcia rides his horse Emir et Djugut inside a giant plastic bubble as they train for the grand opening of the Stockholm International Horse Show at the Globe Arena in Stockholm November 29, 2006. REUTERS/Claudio Bresciani/Scanpix Sweden's central bank, the Riksbank, is warning that house prices are rising too quickly, that household debt is far too high, and that low interest rates in the country could cause serious vulnerabilities in the financial system, leading to a crash in asset prices and, potentially, recession.

Basically, things are really bad.

In its latest Financial Stability Report, the Riksbank puts much of the blame for what it calls the "increasing vulnerability" in the Swedish economy at the door of the country's rampant housing market, saying the ever-expanding housing bubble could fuel a recession.

Here's an extract from the report (emphasis ours):

The structure of the Swedish banking system makes it vulnerable to shocks. As previously, the potential causes of such shocks are the high valuations on asset markets, especially the Swedish housing market, and Swedish households' high level of indebtedness. There are also risks associated with international developments. If a shock arises in the household sector, for example due to a global shock leading to a drop in housing prices, this may lead to a fall in consumption. Such a development could not only have major negative consequences for macroeconomic stability, but could also affect financial stability. Historically, sharp falls in asset prices combined with extensive private indebtedness have contributed to deep and long‐term recessions.

The Riksbank goes into much more detail about the crisis, which has helped push up debt massively to the point at which many households now have a household debt-to-income ratio of as much as 700%. Here's the bank again:

Housing prices have been rising rapidly for a long time. The increase has gone hand in hand with ever‐higher indebtedness in the household sector. In Sweden, the total debt‐to‐income ratio, that is, debts in relation to disposable incomes, is currently at about 179 per cent , which is a high level from both a historical and an international perspective. If we just consider the households that have mortgages, the average debt‐to‐income ratio amounts to 317 per cent. The proportion of households with a debt‐to‐income ratio of between 300 and 700 per cent has increased over the last five years and in particular among high‐income households.

And here are the charts showing just how crazy the housing market is and how insanely high household debt is:

So why are Swedish house prices speeding higher like a runaway train? Negative interest rates.

Since becoming the first major economy to go below zero percent in early 2015, Sweden has been one of the biggest cheerleaders of negative-interest-rate policies, frequently championing their effectiveness in spurring economic activity and boosting inflation and growth.

While the Riksbank says it has seen some pickup in the economy thanks to negative interest rates — inflation and gross domestic product are on a strong upward trajectory — it is now warning that "a long period of low interest rates can provide participants with the incentive to take ever‐greater risks."

Negative interest rates mean banks are punished for not lending out money; any cash stored with the central bank incurs a fee, rather than earning interest as is normally the case. This leads to poorer decision-making when it comes to lending. Riksbank says: "Prolonged low interest rates can put pressure on banks' profitability and cause them to increase their risk‐taking."

Banks just want to get cash out the door, making it super easy to get a mortgage. Demand is therefore much greater than housing supply in Sweden, driving up prices.

Here's the Riksbank again: "Excessive risk‐taking can make the financial system more vulnerable as it can lead to assets being overvalued and risks being incorrectly priced. Such a situation increases the likelihood of large price falls on the asset markets."

Wednesday's report isn't the first time the Riksbank has argued that Swedish households are in too much debt and warned that the country's housing bubble will most likely come to a sticky end, but it is certainly the loudest it has sounded the alarm.

So it's incredibly odd that the Swedes don't seem to be reacting. The OMXS30, Sweden's main share index, is down 1% on the day, in line with the rest of Europe, and the Swedish krona is off just 0.09% against the euro.

The chiefs of the world's biggest central banks are given to treading incredibly lightly around issues of financial and economic stability, with the likes of Janet Yellen, Mario Draghi, and Mark Carney frequently and very deliberately avoiding the use of any language that could suggest any financial instability or woes.

If one of these bankers were to offer such a stark perspective on the state of an economy as that of the Riksbank, markets would crash instantly. Why traders and investors haven't reacted to the Riksbank's doom-laden Financial Stability Report is unclear. Perhaps it's a case of the boy who cried wolf.

Regardless of the market reaction to the report, Sweden's housing market is fascinating. The bubble has to pop at some point, and when it does things could get very messy, very fast.