"A sudden and sizeable fall in Swedish property prices could have a knock-on effect on consumption and unemployment, with negative repercussions on banks through non-performing loans and funding costs," the IMF wrote in a new report published on Thursday.
The IMF warns that the fall out could have regional consequences across Scandinavia and the Baltic region and identified the main risks as the high level of household debt, which is amongst the highest in the OECD.
Furthermore the IMF warns of banks that are excessively large in relation to the country's GDP and weaknesses in bank financing models, explaining that the risks are more pronounced due to the low levels of amortization on mortgages and deficiencies in the tax system.
"Domestically, household debt is high and rising, reflecting tax incentives, easy access to low-amortization mortgages, and very low interest rates," the report stated.
With regards to the tax system, the IMF recommends a review and raises the prospect of phasing out breaks and mortgage interest tax relief.
Sweden's Riksbank on Thursday confirmed that the main base (repo) interest rate will remain at one percent and left its forecast unchanged. The repo rate is due to be raised towards the end of 2014, according to the forecast.
The Riksbank's decision means that fluctuating interest rates are set to remain the same (at around 2.9 percent) for the time being.
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