Residential housing in the Hornstull district of Stockholm, Sweden.
The new government will consider reducing tax deductions on mortgage interest and is studying how Denmark implemented similar measures, Financial Markets Minister Per Bolund said in an interview at the Finance Ministry in Stockholm on Nov. 28. Any measures need support from the other political parties in parliament, he said.
Swedes can write off as much as 30 percent of their interest costs from taxes, which policy makers including the financial regulator have warned acts as an incentive to take on
credit at a time when Sweden is seeking to reduce household borrowing amid concern over the risk it poses to financial stability. Record low rates and a housing shortage have pushed home prices to records.
“You can either lower the threshold at which you are allowed to make interest-rate deductions, that is one way of changing them, or you can reduce the percentage that you can deduct,” Bolund said. “Denmark has had a broad agreement between the political parties and gone through a tapering of some percentage point each year, which can be a way of not creating conditions that are too bumpy.”
Preventive Measures
Denmark has been reducing deductions since 2012 one percentage point annually and will continue doing so until 2019, according to Sweden’s National Board of Housing, Building and Planning. The change applies only to people with interest costs of more than 50,000 kroner, meaning “a relatively small number of people are so far affected by the reduction because rates are currently low,” the board said.Sweden is seeking to prevent a crisis before it happens, unlike Denmark, which was forced to act during a crisis and had “a relatively difficult journey,” Bolund said. Sweden will seek to “introduce measures pre-emptively, before we end up in financial instability, and try to counteract a debt accumulation that could carry risks,” he said.
The country will also need to evaluate the effects of new amortization rules before introducing any further measures, Bolund said. He also joined other policy makers in saying that changes must be gradual to avoid a repeat of what happened in the Netherlands, where house prices slumped after borrowing rules and interest deductions were tightened.
Time Now?
Yet changes must also come while rates are low since that limits the impact on households, he said. That may mean the time is ripe.
Sweden’s central bank in October cut its benchmark repo rate to zero as it tries to jolt the largest Nordic economy out of deflation. The average rate for new mortgages dropped to 2.06 percent in October from 2.70 percent a year earlier.
Credit growth is once again accelerating. Borrowing grew a more-than-estimated 5.9 percent in October, up from 5.7 percent the month before. It has picked up from as low as 4.5 percent in January last year.
Current levels are too high, according to Bolund, a Green Party minister who formed a minority government with the Social Democrats in October.
“It is very much higher than inflation and also above the level of income increases that we have,” he said. “It could create problems in the longer term, so we need to follow the development and see whether further measures are needed.”
Sweden’s economy is predicted by the government to expand 2.1 percent this year and 3 percent next year. Wage growth for non-manual workers stood at an annual 2.6 percent in August, while annual consumer prices declined 0.1 percent in October.
Bolund said he “will do everything” to avoid a situation where debt spins out of control or where Sweden ends up in a banking crisis similar to the one it suffered two decades ago.
“We risk ending up in renewed financial instability,” he said. “I was there in the 1990s and we have seen what happened in Greece, Spain, Portugal and Ireland.”
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