Swedish Mortgage Cap May Be Relaxed in Social Democrat Plan

Sweden’s Social Democratic Party, which polls show will oust Prime Minister Fredrik Reinfeldt’s ruling coalition in elections next month, is ready to relax a regulatory limit on mortgage financing.

The party says a rule that prevents Swedes getting loans for more than 85 percent of property values hurts first-time buyers. According to Magdalena Andersson, the party’s economic spokeswoman, the Social Democrats may seek to ease the loan-to-value cap if the regulator introduces rules that force households to amortize their mortgages. Less well-off Swedes would be exempt from such a requirement, she said.

“It’s important when we take measures that we don’t for example exclude young families,” Andersson said in an Aug. 23 interview south of Stockholm. “The mortgage cap is undeniably something that creates bigger problems for young people.”

The proposal, which would reverse a 2010 limit put in place during Reinfeldt’s tenure to contain record household debt, risks colliding with central bank pleas to slow credit growth. Riksbank Governor Stefan Ingves said last week failure to address consumer indebtedness could force the central bank to tighten monetary policy to protect financial health.

Tax Rejection

Andersson also rejected proposals by Ingves and the regulator to adjust Sweden’s tax code to help curb debt, a recommendation Reinfeldt has treated with caution. Swedes can deduct as much as 30 percent of interest payments from their taxes. The central bank and International Monetary Fund say the law creates an incentive to borrow.

“Many households, not least young households, have planned their personal finances based on the rules that exist here and now,” Andersson said. “I don’t want to make changes that would pull the rug from under the feet of single households.”

The government on Aug. 23 lowered its economic growth forecast for a second time since July, predicting an expansion of 1.9 percent this year, versus an earlier forecast for 2.5 percent growth.

The government and regulator are exploring more options to address Sweden’s debt burden, which the central bank estimates is about 175 percent of disposable incomes, the highest on record. Swedes’ addiction to borrowing has intensified over the past half decade. Consumers in the AAA-rated country used record-low interest rates during Europe’s debt crisis to take on credit in a cycle that contributed to record housing prices.

‘In Context’

The Financial Supervisory Authority said last week debt measures worth considering include the introduction of an amortization requirement on home loans, a loan-to-income ratio and a lowering of the mortgage cap. Ingves and the IMF both recommend tightening the cap further so that Swedes can’t borrow more than 75 percent of home values.

Yet Andersson of the Social Democrats, who is set to become finance minister if the opposition wins the Sept. 14 election, says “it’s not unreasonable to discuss the mortgage cap” as a lever that can be relaxed and that any amortization rules should be discussed “in context” with the mortgage cap.

“I’m not a stranger to having a sharp amortization requirement but I think that it’s important that we discuss it thoroughly,” she said. “There are periods in your life when it may not be so appropriate to amortize.”

The Key

The way to prevent the property market from overheating is to ensure there’s an adequate housing supply to help control prices, Andersson said. She wants state-owned lender SBAB to be capitalized with 3 billion kronor ($434 million) -- to be taken from other state-owned assets Andersson declined to identify -- to fund an increase in home building.

“Construction is key to damping the price development that we’re seeing,” said Andersson. “It would be good in the long-term if indebtedness would fall.”

Andersson also said she would consider restrictions on the use of floating mortgages and that she’s open to raising capital requirements for banks further as well as boosting payroll taxes for banks.

She’s also willing to discuss introducing tax or fee for banks to help fund the central bank’s foreign currency reserve.

The three-party opposition has 46 percent voter backing versus 37.5 percent for the four-party government, according to an Aftonbladet/United Minds poll released today. The anti-immigration Sweden Democrats were backed by 11.5 percent, the poll showed.

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