Mum's the word on soaring Swedish household debt as poll nears

Johan and Alejandra are the kind of Swedes the International Monetary Fund has been warning about – piling up debt to keep up with an ever-rising property market and fund a lifestyle of travel, maids and nights out.

The couple plan to buy a flat in Stockholm for five to six million Swedish crowns (up to €650,000, initially with an interest-only bank loan, among other spending plans.

“I may travel, I may want to invest in a new business,” said Alejandra, who runs a cafe in the city centre.

A few days away from a general election, there are no votes in campaigning to stop the credit flowing, but there are fears that such Swedes could be the Achilles heel of a country that boasts a coveted AAA score from credit rating agencies Fitch and S&P.

Four in 10 mortgage borrowers in Sweden are not paying off their debt, and those who are repaying the principal do so at a rate that would, on average, take nearly a century.

Swedish property prices have nearly tripled in just two decades. In July, home prices rose at a double-digit pace from a year ago – the first time in more than four years. The IMF has warned financial instability in Sweden is an increasing concern and urged a comprehensive set of macroprudential measures to temper soaring mortgage debt.

Nobel Prize laureate and economist Paul Krugman has chimed in, saying Sweden probably has a significant housing bubble.

With Sweden's household debt-to-income ratio above 170 per cent – among the highest in Europe and rising – the issue is worrying Riksbank policymakers. Out of fear of spurring more borrowing, the central bank has kept interest rates higher than warranted by inflation, but they are nevertheless at historic lows.

Fears

The main concern is that private consumption – which makes up nearly half of Swedish GDP – would suffer if rates rose or property prices fell, which could spell problems for the lenders and the economy, which is only just finding its feet.

Sweden knows all too well the damage that a property bubble can wreak when it bursts. Financial deregulation in the 1980s led to a boom in commercial property that crashed in 1992. Commercial properties lost nearly two-thirds of their value and Sweden had to nationalise two of its banks.

The country was in recession for three years and had to implement a tough austerity programme to turn around a massive budget deficit.

Pre-emptive measures

Economists are urging pre-emptive measures, such as property taxes and a cut in tax deductions, but it’s a delicate topic ahead of the elections on Sunday.

"I'm an economist – I love the property tax," said Magdalena Andersson of the poll-topping Social Democrats, who is widely tipped to be Sweden's next finance minister. "But the Swedish people hate it and don't want to pay it, so let them pay other taxes."

Swedish property taxes as a percentage of GDP are at the low end for OECD countries, and only one-third that of the United States. Politicians are also sidestepping suggestions to scale back interest rate deductions on mortgages, though most agree it would be highly effective in cooling prices.

"Neither side wants a discussion about property taxes nor interest rate deductions in a pre-election campaign – it's politically unpopular," said John Hassler, professor of economics at Stockholm University's Institute for International Economic Studies, who had both Andersson and Sweden's current finance minister, Anders Borg, as his PhD students.

The politicians are reluctant with good reason – the Social Democrats’ tough stance on maintaining high property taxes was a major contributor to their defeat in 2006.

Some argue that the risks are manageable. They point to a high level of savings and attribute the sharp price rise to a short supply of new homes.

A Swedish household's total assets, made up of financial assets, savings and real estate, are about three times as big as its total debt, prompting some economists, such as former Riksbank deputy governor Lars Svensson, to argue there is no problem.

High private debt should also be seen against a backdrop of relatively low public debt – Sweden is forecasting a debt-to-GDP ratio of just 41.3 per cent, which gives it a degree of resilience.

What most politicians do agree on is the need to shift away from interest-only mortgages. Such mortgages helped inflate Ireland’s disastrous property boom.

Sweden’s centre-right government has asked regulators to come up with a plan to force repayment schedules.

It has set a November deadline – which if opinion polls are right will be two months after it loses power to a centre-left opposition.

The Social Democrats have not laid out plans on the matter. – (Reuters)