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STOCKHOLM, June 13 (Reuters) - The International Monetary Fund said on Friday financial instability linked to a booming housing market was a growing concern for Sweden's economy and urged measures to temper households' soaring mortgage debt.
Although Swedish banks were relatively unscathed by the global financial crisis following the collapse of Lehman Brothers, regulators have already introduced some of Europe's tightest capital rules. They argue that with assets four times the size of the economy, banks represent a risk to stability.
Household debt levels of around 174 percent of disposable income and rising are a key part of the problem and the central bank has said lenders should tighten up how they calculate what level of mortgage households can pay.
"Financial instability is an increasing concern," the IMF said in its annual review of the Nordic country published on the Swedish central bank's website.
"It is time for a comprehensive set of macroprudential actions that, gradually implemented, would help steer mortgage credit demand towards a sustainable path."
Swedish property prices have risen throughout the financial crisis and have almost tripled in the last 20 years.
The Fund said the most important measure would be to introduce a binding maximum amortisation period for new mortgages. It also suggested limits on debts in relation to household income and tightening a loan-to-value cap to 75 percent from 85 percent.
Many Swedish households have interest-only mortgage loans and a recent study by Riksbank found that it takes on average 99 years to pay off the mortgage for those households who do pay down the principal on the loans.
The Riksbank, wary of the high levels of household indebtedness, has kept interest rates at 0.75 percent since December last year, despite inflation undershooting its 2 percent inflation target for more than three years.
Doing so has led to fierce criticism from former Riksbank governor Lars Svensson and from Nobel laureate Paul Krugman, who labelled the Riksbank's policy as "sado-monetarism" and warned that Sweden could face Japan-style deflation if it continued to undershoot the inflation target.
The IMF, however, said the current monetary policy struck an appropriate balance between price and financial stability risks, but said changes - such as slipping inflation expectations - would warrant a shift in policy. (Reporting by Johan Ahlander and Niklas Pollard; Editing by James Macharia)