* FSA seeks government approval for tougher mortgage rules
* Housing price gauge posts biggest drop since 2007
* Tricky decision for govt ahead of 2018 elections (Adds details, quotes)
By Simon Johnson
STOCKHOLM, Nov 13 (Reuters) - Sweden’s financial watchdog has proposed a further tightening of mortgage repayment rules to keep a lid on spiralling debt that could spell danger for the cooling property market and the wider economy.
A surge in building and tougher mortgage rules have put the brakes on a 20-year bull run in the Swedish property market, but authorities remain concerned that debt levels among the highest in Europe are still rising.
The country’s Financial Supervisory Authority (FSA) on Monday proposed new rules to force the biggest borrowers to make larger mortgage repayments in an effort to reduce risks.
“Prices have risen more than 30 percent in the past three years and the risk level is elevated,” FSA chief economist Henrik Braconier told reporters.
He said a recent fall in prices was insignificant compared with increases over recent years.
“It is not a catastrophe if prices fall a little,” he said.
The Nasdaq HOX Valueguard-KTH Housing index was down 1.5 percent in September.
Stockholm ranked second only to Toronto on banking group UBS’s recent Global Real Estate Bubble Index of cities where prices were out of line with fundamental developments.
Riksbank Governor Stefan Ingves said recently that not going forward with tighter mortgage rules would be an “abdication of our responsibility for macroeconomic oversight”.
However, the proposal puts the minority government in an awkward position. If it backs the FSA, it risks angering voters ahead of next year’s election. The centre-right opposition bloc does not support the proposal.
If Markets Minister Per Bolund gets cold feet, he risks undermining the FSA’s efforts to cool the housing market.
Bolund said the government would study the proposal and include the opposition in discussions.
The real estate market has been a source of concern for years.
Decades of underbuilding and a highly regulated rental market have forced up prices and borrowing, helped in recent years by ultra-low rates. Many mortgage-takers only pay interest, not reduce the principal on loans.
The European Commission and the International Monetary Fund and others have warned about the risks associated with Sweden’s high debt levels and soaring prices.
Ireland, Portugal and Spain are only now pulling clear of the mess created when their housing bubbles burst a decade ago.
To head off trouble, the FSA has introduced a loan-to-value cap, forced banks to hold more capital against possible losses from mortgage lending and tougher repayment rules for new borrowers.
Banks have tightened up their lending practices.
The government is also looking at tax changes that could hit commercial real estate firms while the central bank, among others, has called for phasing out generous mortgage tax relief for households.
Some worry there is a risk authorities will go too far.
“Poorly thought out political decisions could hurt the property market and in a worst-case scenario spark a housing crisis,” Norwegian builder Veidekke said in a report on the Swedish housing market this week.
With the economy growing strongly, unemployment relatively low and interest rates at rock bottom, most analysts do not expect a crash, but there are signs of weakness.
Monday’s Housing Price Indicator from banking group SEB registered its second-biggest drop ever, falling by 39 points. The only steeper fall was at the start of the global financial crisis 10 years ago.
SEB said 43 percent of households expect prices to rise over the coming year, down from 66 percent the previous month. The number expecting prices to decline doubled to 32 percent.
Real estate agents have reported prices falling over the past month and fresh figures from Nasdaq HOX Valuguard-KTH due on Tuesday are expected to show further falls.
Shares in property developers have also slumped, hit by a glut in the market and increased caution among buyers. The Swedish crown, meanwhile, has weakened and mortgage bond spreads widened.
“I‘m not against the (FSA‘s) measure in principle, it is (just) that the timing is wrong,” said Anna Breman, chief economist at Sweden’s biggest mortgage lender, Swedbank.
“It is good that the market is calming down, but you don’t want to spark a bigger price fall, which would have considerable negative effects on the Swedish economy.”
The FSA said the rules, which need to be approved by the government, will force new borrowers who take loans of more than 450 percent of their gross income to pay off an additional 1 percent of their mortgage every year.
The measure will affect about 15 percent of new borrowers, the FSA said.
Additional reporting by Johan Ahlander and Johan Sennero; Editing by David Goodman and Toby Chopra