November 25, 2015 / 11:11 AM / 4 years ago

UPDATE 1-Swedish central bank calls for action as Nordic property market fears grow

* Swedish central bank calls for tighter mortgage repayment rules

* C.bank also seeks lower mortgage tax breaks

* Says banks need more capital, should reduce liquidity risks (Adds further cenbank comment, background, Norway worries)

STOCKHOLM, Nov 25 (Reuters) - The risk of a house price crash in Sweden is growing, the central bank warned on Wednesday, saying the country must rein in borrowing and strengthen its banks amid concerns property markets may be overheating throughout the Nordic region.

Authorities in Sweden and neighbouring Norway are worried that households have taken advantage of low interest rates to pile on debt, fuelling already sky-high property prices and threatening to derail otherwise robust economies.

Sweden’s central bank said “the probability of a fall in prices is elevated”, in the second of its twice-yearly financial stability reports, adding that with high levels of debt, “the consequences for the Swedish economy could be great”.

Property prices in Sweden have more than tripled over the last 20 years, driven by a lack of building, rent controls and generous tax breaks on mortgages.

In Denmark, a 20 percent fall in house prices sparked by the financial crisis in 2008 dragged the economy down into a long slump from which it only finally exited late in 2013.

In Norway, regulators have repeatedly warned that a housing boom could lead to a crash, though there are signs price rises are losing momentum.

Swedish household debt levels, at around 170 percent of disposable income, are among the highest in Europe, and the central bank has been growing increasingly concerned.

But fears of deflation have put the bank in a corner, forcing it to cut interest rates to a record low of -0.35 percent and begin buying bonds to push down yields, in moves that only add fuel to the borrowing bonanza.

Further easing by the European Central Bank could push the Riksbank to cut rates further.

With its hands tied in terms of measures to cool borrowing, the Riksbank has campaigned for the government and Financial Supervisory Authority to do more to counteract low rates.

The Riksbank said a package of measures such as tighter mortgage repayment rules and a reduction in mortgage tax relief was needed to cap borrowing demand. Capital requirements for banks should be tightened to make them more robust.

The country has introduced a loan-to-value cap to cool the market, and banks have been forced to set aside higher levels of capital than many of their European rivals.

But plans to introduce tighter mortgage repayment rules have been delayed after a legal challenge, while politicians are unwilling to touch tax breaks for fear of alienating voters. (Reporting by Stockholm Newsroom; Writing by Simon Johnson; Editing by Hugh Lawson)

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