House Prices and Indebtedness in Sweden: a Model-based Assessment of Policy Options

Abstract:

House prices and mortgage debt in Sweden had grown steeply over the two decades previous to 2016, driven by the favourable tax treatment of property investment and mortgage borrowing, as well as particular features of the Swedish mortgage market that reduced effective debt service costs. The steep rise in household indebtedness created medium-term risks of a disorderly deleveraging process that could have an adverse impact on the real economy and potentially the banking sector.

In this Economic Brief, the macroeconomic impact of three potential policy options that could help to address Sweden's house price/mortgage debt dynamic were simulated and suggested 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.