* Swedish household debt-to-income ratio above 170 pct
* Four in 10 mortgage borrowers not repaying capital
* IMF says financial instability an increasing concern
* Politicians steer clear of remedies ahead of Sept. 14 poll
By Mia Shanley and Johan Ahlander
STOCKHOLM, Aug 24 Johan and Alejandra are the
kind of Swedes the IMF 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 5 to 6
million Swedish crowns ($724,000 to $869,000), 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.
Less than a month 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 that 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
percent - 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
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.
FEELING THE HEAT
May and Philip, who have just bought the house of their
dreams in a northern Stockholm suburb - a place where they can
sail in the summer and ski in the winter - are already feeling
With borrowing costs at historic lows - the couple pays
about 2 percent - they can make ends meet. It's the future that
"We can't afford a 5 percent interest rate with amortisation
(principal repayment) on our salaries," said May. "At 8 percent,
if the bank doesn't give us a break from making payments on the
principal, we'll lose our house."
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
Economists are urging pre-emptive measures like property
takes and a cut in tax deductions, but it's a delicate topic
ahead of the Sept. 14 elections.
"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," she told Reuters in an interview.
Swedish property taxes as a percentage of GDP are at the low
end for OECD countries, and only one-third that of the United
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 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
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 percent, which gives it a degree of
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. The country's central bank warned last month that almost
half of them were due to revert to full payment in the next two
years, ramping up the threat to the country's recovery.
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.
Other Nordic countries are facing similar problems, even
though Norway's economy is in better shape than Sweden's, and
the Danes also have substantial savings.
In Norway, household debt is around 200 percent of
disposable income - twice the euro area average - and Denmark's
is even higher - at 300 percent and among the highest in the
Regulators in Norway and Sweden have already tried using
loan-to-value caps for mortgages - now at 85 percent - and
higher risk weights on mortgage portfolios to counter
But prices are heating up again in Norway. The country's top
real estate association had expected prices to fall 1-3 percent
in the country this year, but it has now revised that to a rise
of 2 percent and accelerating.
Property prices in Denmark are still below pre-crisis levels
but the market has been getting warmer since late 2011.
In Sweden, it is already hot.
At a recent viewing of a two-bedroom flat in central
Stockholm, a crowd of people packed into the 92-square-metre
(990 sq feet) space for a 30-minute glimpse of what later sold
for $1 million after a four-day bidding war - 13 percent above
Banks say they have already taken matters into their own
hands. The Swedish Bankers' Association recommends that loans
over 70 percent of the value of a home should be on a capital
SEB says it is trying to get all new borrowers to
pay off their mortgages in 50 years.
But Christian Clausen, CEO of Nordea, the region's
biggest bank, gets riled when asked about mandatory repayment.
"We need some flexibility," he told Reuters, noting that an
elderly couple or a younger couple just getting their careers
started may have good reason not to want to repay the principal.
"Flexibility is good because not all households are equal."
The banks have long complained about being overregulated
relative to their European peers, but in the long term they
could benefit from tougher such rules on their customers, if it
avoids the kind of property crash that followed the
credit-fuelled exuberance in places like Spain and Ireland.
"Structurally, that is an area which some investors see
Sweden as a dangerous system," said Nick Davey, an analyst at
($1 = 6.8842 Swedish crown)
(Additional reporting by Sven Nordenstam in Stockholm, Camilla
Knudsen in Oslo, Ole Mikkelsen in Copenhagen; Editing by
Alistair Scrutton and Will Waterman)