Swedish regulatory group says mortgage debt risk limited

STOCKHOLM, Oct 16 (Reuters) - High levels of mortgage debt present only a limited risk to the Swedish economy, but more measures should be taken to control household borrowing, the country’s central bank and financial watchdog said on Wednesday.

The central bank and other regulators have pointed to surging house prices and household debt levels among the highest in Europe at over 170 percent of disposable income as a threat to Sweden’s economy.

The authorities have taken steps to dampen both mortgage borrowing and lending to house-buyers by banks.

However, a study conducted for the Council for Cooperation on Macroprudential Policy, staffed by the Riksbank and the country’s Financial Supervisory Authority (FSA), suggested such fears may be overdone.

“These analyses indicate that households in general have a strong repayment capacity and that the risks are low for most individual households even in stressed situations,” the report said.

“The analyses also indicate that there is a low risk that the banks will incur large credit losses from mortgages.”

But the report warned that should the economy be hit by a combination of shocks, such as a new downturn, rising unemployment and falling house prices, the effects of high debt levels on financial stability could be dramatic.

“Prudence would indicate that there is good reason to consider additional measures relatively quickly in order to handle the risks of today’s historically and, from an international perspective, high aggregate debt ratio,” the report said.

The government has already capped borrowing at 85 percent of the cost of a property and bumped up the amount of capital banks must set aside to cover possible losses from mortgage lending.

Several central bankers, including Riksbank Governor Stefan Ingves, have called for tougher measures. Authorities have also discussed making paying down mortgages compulsory, although this measure has been rejected for now.

Currently, Swedes can pay only interest on loans of less than 75 percent of the value of the property.

At current rates of repayment, it would take Swedes on average 140 years to pay off their mortgage debts. Debts are passed down to the next generation or homes are sold to meet debts. (Reporting by Simon Johnson; Editing by Ruth Pitchford)