House prices and indebtedness in Sweden : a model-based assessment of policy options

House prices and mortgage debt in Sweden have grown steeply over the last two decades. This has been driven partly by strong fundamentals but also by the favourable tax treatment of property investment and mortgage borrowing, as well as particular features of the Swedish mortgage market (low amortisation rates and a high share of variable-rate mortgages) that reduce effective debt service costs. The steep rise in household indebtedness creates medium-term risks of a disorderly deleveraging process that could have an adverse impact on the real economy and potentially the banking sector. Accordingly, the Commission (COM(2016) 95 final/2) identified Sweden as experiencing a macroeconomic imbalance deserving monitoring and policy action. In this Economic Brief, we simulate the macroeconomic impact of three potential policy options that could help to address Sweden's house price/mortgage debt dynamic: (i) a tighter mortgage amortisation requirement; (ii) abolishment of mortgage interest tax deductibility; (iii) higher recurrent property taxes. For the latter two measures, the incremental tax revenues from these policies are allocated to reducing labour taxation, so that the measures are ex ante budget-neutral. While specific quantitative outcomes of macroeconomic simulations should be interpreted with care, our analysis suggests that a more ambitious mortgage amortisation requirement could significantly reduce household indebtedness, with no meaningful adverse impact on growth, jobs, or long-run housing investment, and that the two tax-related policy options could also help to reduce indebtedness while raising output, consumption and employment. All three policy scenarios have the (desirable) effect of weighing somewhat on long-run house price growth, without causing a 'hard landing' or an excessive reduction in long-run housing investment.