A RALLY in Swedish home prices that made its housing market one of the world's frothiest is reigniting political calls to remove a controversial tax perk seen as part of the problem.
There is consensus in Parliament that a 30 per cent reduction on mortgage-interest costs should be phased out, a move backed by both the central bank and the country's financial regulator. But the two ruling parties in Sweden's teetering minority coalition are split over the urgency of carrying it out.
The housing rally there mirrors property booms from Canada to New Zealand, and was ranked by Bloomberg Economics in the past month as Europe's bubbliest. Such dynamics are pushing some monetary authorities towards raising interest rates, but the Riksbank's reluctance to do so as it focuses on its inflation target is shifting focus to other options.
Sweden stands out alongside the US as one of the countries still to allow mortgage-interest deductions, in what is essentially a middle-class tax incentive for home ownership. Tweaking such policies can be precarious, as witnessed in the UK, which suffered a housing crash lasting years after it curtailed a similar measure in 1988.
"There is definitely a move towards acknowledging that something more significant may need to be done, but it's not easy," said Helena Bornevall, an economist at Handelsbanken. "There is always a risk to the market if you take radical measures too rapidly."
That is the worry giving Sweden's coalition pause for thought. Financial Markets Minister Asa Lindhagen, of the Green Party, seeks to start phasing out the deduction already next year, while Social Democrat Finance Minister Magdalena Andersson wants to negotiate a wider political deal before reducing the incentive. They agree, though, that any changes should be gradual.
"It needs to be predictable and it has to be done slowly, and you need to make sure that households are compensated," Ms Andersson told journalists earlier this month.
While house prices in the largest Nordic nation have increased by about 20 per cent in the last 12 months, there is heightened political sensitivity about real estate after a crisis triggered in June by plans for rental-home deregulation almost prompted the first snap elections there since 1958.
Removing the tax incentive would, in theory, add about 20 billion kronor (S$3.1 billion) to the government's coffers, though no one advocates removing the tax break in one go.
Robert Boije, the chief economist at state-owned mortgage lender SBAB, warns that Swedish home prices could drop as much as 30 per cent if interest deductions on mortgages were abolished, said an opinion piece in Dagens Industri.
Sweden's house-price gains of about 74 per cent since 2010 are higher than the European Union average of 31 per cent, but in line with Germany's increase and lower than Estonia's, which saw the steepest price hikes in the 27-member bloc at 127 per cent, showed Eurostat data.
Riksbank governor Stefan Ingves recently compared the country's rise in household debt to sitting atop a volcano. Sweden could find itself "in a scenario that is difficult to manage" if housing imbalances are not dealt with, he said at a recent central-bank meeting. His own institution faces criticism itself for keeping interest rates low and purchasing the covered bonds that finance the country's mortgages with its quantitative easing.
Only the Moderates, currently Sweden's largest opposition party, are explicitly opposed to a tax reform, while others want a gradual reduction to avoid irking voters who benefit from property taxes reckoned by the International Monetary Fund to be "extremely low".
There are signs of a cooldown. Residential property prices declined 0.5 per cent on the month in June, with the annual price increase slowing to 16.8 per cent from 17.9 per cent in May, showed the Nasdaq OMX Valueguard-KTH Housing Index, HOX Sweden. Single-family homes, driving the rally, also depreciated by 0.8 per cent from May.
The main impending action to cool prices for now is the reinstatement by Sweden's financial watchdog of mandatory mortgage amortisation next month - but analysts do not expect that to achieve much. BLOOMBERG