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'Lower mortgage interest tax break': Liberal Party

TT/The Local/dl · 5 Jan 2011, 11:18

Published: 05 Jan 2011 11:18 GMT+01:00

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"Sweden's GDP is growing at a record pace. Optimism is strong in most areas. That can very well mean that house prices will continue to rise and that the risk of a housing bubble increases if measures aren't taken," wrote Liberal Party economic policy spokesperson Carl B. Hamilton in the Dagens Nyheter (DN) newspaper.

Reducing the tax break Swedish homeowners receive on the interest payments they make on their mortgages is a "soft" way to control rising house prices without stifling growth for "the whole economy and job development." he argued.

Hamilton proposes reducing the current 30 percent tax break to 25 percent at the end of the year, calling such a measure "effective and targeted."

"It would be less advantageous for households to borrow, but not for companies," wrote Hamilton.

"If the housing bubble were instead managed by the Riksbank through higher interest rates, there is a risk that the entire Swedish economy would be cooled off more than desired."

Hamilton's proposal comes amid speculation that Sweden is entering a housing bubble, with some experts arguing that steady rising real estate prices may come crashing down in the coming year as interest rates rise, further pinching the wallets of Swedish homeowners – many of whom have flexible rate mortgages.

Pär Magnusson, head analyst for the Nordics at the Royal Bank of Scotland, is among those concerned about a Swedish housing bubble.

However, he rejected Hamilton's proposal of reducing the mortgage interest tax deduction.

"It won't really have much effect. It feels like playing to the gallery," he told the TT news agency.

Magnusson estimates that, at current interest rate levels, the reduction would be equivalent to a rate increase of 0.25 percent.

He believes a more effective instrument for dealing with a housing bubble would be a requirement that Swedes pay down the principle of their mortgages.

"That would give you a real effect, which addresses what the exact risk is," he said.

An amortisation payment requirement on the amount of a mortgage that exceeds 70 to 75 percent of a home's value would be appropriate, according to Magnusson.

He was also critical of moves by the Riksbank to combat rising house prices by adjusting the repo rate, Sweden's benchmark interest rate.

Magnusson described monetary policy as too blunt a tool which comes down unnecessarily hard on the entire economy.

Roger Mörtvik, the head of social policy at the Swedish Confederation for Professional Employees (TCO), a white-collar union, also cast doubt on Hamilton’s proposal.

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"It's starting at the wrong end," he told the TT news agency.

An important first step, he argues, is establishing whether or not there is a housing bubble and if so, carefully analyzing how to deal with it.

Mörtvik also warned for unintended consequences of a reduction in the mortgage interest tax break.

If the reduction isn't compensated with a lower income tax, for example, the desired effect of controlling housing prices would disappear.

"And if prices aren't brought under control and it just gets more expensive to borrow, that would make it harder for young people to enter the housing market," argued Mörtvik.

TT/The Local/dl (news@thelocal.se)

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Your comments about this article

13:48 January 5, 2011 by Arturio
I don't understand what's the problem to build new houses in sweden, in particular in stockholm. It's a easy solution to prevent the bubble market and give the opportunity to the young population to buy their first house with special incentives.
14:53 January 5, 2011 by stoffer
@Arturio that's a simplistic view. The companies building new houses are however building them for their own profit, not for people to have place to live. For them the most profitable thing is build cheap and sell expensive. If they keep the demand high, by building fewer houses, they keep prices high (as simple as supply and demand law). Of course, that requires coordinated actions across the industry, but in this game, the winning strategy is to follow the rules, so we won't see bazillions of apartments being built anytime soon.

Another thing, is that houses bought with loan money are pumping the bubble. To some degree, if people would have to buy their apartments with their own money (to a substantial degree), the demand would drop and drop in demand would mean that the construction companies would have to lower their profit margins (which universally, around the world, are the biggest part of the price, if the is an estate bubble), due to the effects of elasticity. Of course, there will be a countering effect of price elasticity of demand, but I guess that steady state prices per m^2 would be lower.

If we are giving loans to anyone, we who does not have his/hers own saving, we are going to pump an estate bubble, because the effects of loans are included into the income elasticity of demand, even though a loan is not really an income - in fact it can in log term constitute a loss, and it will constitute a loss if the prices of houses will not increase faster than inflation.

That situation is NOT sustainable, because of positive feedback - higher prices will push higher demand for loans/mortgages, banks will happily increase the supply, that in turn will mean that the income elasticity of demand will cause the demand to raise, that will cause the prices to increase again, that again will increase the demand for mortgages, banks will again happily give out more mortgages, and due to this positive feedback the machine will rev faster and faster until it explodes into millions of glittery pieces, just like it did in the US.

That situation can be avoided by requiring people to cover at least 25% of the price of their new home with their own money. That should stop the vicious cycle.
17:09 January 5, 2011 by KungsholmenGuy
Agree that 25% would cool things off, but 25% is a bit steep, so in my view a mandatory minimum 10% or so downpayment in cash would be a good rule, along with mandatory monthly payment of both interest and principal, and I think this policy exists at SEB at least, and should by applied by law to all banks if it does not already. (Does anyone know if this is a law?)

By reducing the tax break, this is effecitvely a tax increase, which is the last thing Sweden needs, and would screw existing homeowners because their resale value would be hurt. Likewise a suddenly imposed minimum of 25% would also be very hurtfull to resale values. The minimum % ownership would have to be increased slowly to avoid an overnight plunge in re-sale values.

Downtown Stockholm, just like downton London or NYC is prime real estate, so first time homeowners should not automatically assume that they are entitled to own a medium or large apartment there, particularly in Sweden, where good commuter infrastructure exists so that they can still commute to work. The real question of whether or not there is a bubble should therefore be directed to affordability of the network of suburbs that are within commuter reach.
00:13 January 6, 2011 by mojofat
Perhaps propose dropping the mortgage tax break to 25% unless you have 20% of your home's principle paid off, once you cross that threshold you could have your 30% tax break.

Having just come from California (where I still own property) what I hear from people around me is very reminiscent of the housing bubble there. People in a frenzy to buy anything, no money down, interest only payments...I thought it impossible that any country on earth had not learned the lesson of the poor banking policies in the US. The main thing is to have people vested in the property, otherwise there comes a time when there's a perverse incentive to walk away because you're not losing any money (but you are losing by continuing to throw money in an underwater property). Hope they figure something elegant out and not ham-fisted.
10:51 January 6, 2011 by stoffer
@mojofat - 10% required downpayment is probably the easiest and the most effective fix. That should stop the vicious cycle. Also, construction companies should be taxed not according to the total profit they make, but the profit margin per square meter. say, 10% profit margin is free of tax, anything above is taxed 70%. Thus, in such setting the most effective way to increase the total profit is to build more houses, to the point there is balance of supply and demand. Otherwise the construction companies will keep the supply below the demand to increase the prices.
15:28 January 6, 2011 by Streja
People already put 10% down.
13:12 January 7, 2011 by Mb 65
This is how you create a bubble. people take out a bigger loan than they can realistically afford and when the bubble bursts they are in s--t street. Just look at England. people are paying their mortgages with their Visa cards.
13:50 January 7, 2011 by hjoian
yet again greed of the banks plays its part. It came as a surprise to discover how many Swedes could afford their apartments,new cars, boats and camper vans, but with cheap interest only loans,it seems most have bought on the "never never". Fact is they dont actually own anything,and their pay is spent mostly on paying off loans. I dont know if this is culteral or a personal thing, but i dont owe anyone money and own everything i have by bloody hard work, and wouldnt want it any other way. I think down payments of at least 15% is a good idea. Mortgage regulations have changed dramatically in the uk since the bubble burst, and first time buyers are struggling......people forget that its first time buyers who mostly keep the housing market moving.....i see falling prices in the UK this year, but people will still stuggle to get money from the banks.... it is the banks after all that control the whole market.
14:29 January 7, 2011 by Mb 65
In England all the financial advisers said take out the biggest mortgage you can and don't it off. Then years later they start to tell everyone to pay off their mortgage. My mortgage was the only debt i ever had and i paid it up as soon as i could it was the best thing i ever did apart from buying my first house.
07:14 March 11, 2011 by tonette44
Home loans have low rates of interest in the market right now, which makes for some low cost loans for those who qualify for the financing. The market hasn't fully recovered from the 2008 crash, and mortgage loans are at near record low interest rates, including the 15 year fixed, the 30 year fixed, and the five year arm. Several think that a double dip in the housing sector is now very much a possibility.
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