While large parts of Europe are in the process of phasing out or have already dropped tax breaks for homeowners as part of efforts to slow spiralling property prices, Sweden is moving in the opposite direction, according to a working report by the European Commission.
Households in the Nordic country enjoy the most generous tax benefits in the EU, well ahead of countries such as France, the United Kingdom or Spain, says the report.
Unlike in many countries, Swedish homeowners often never repay the full amount of money they borrow from banks or building societies – a process known as amortization – with many only paying off the interest earned, of which they are allowed to write off as much as 30 percent on their taxes.
The latter issue in particular coupled with soaring property prices on the Swedish market and increasingly indebted households has sparked several warnings that Sweden's housing bubble could burst, from organizations such as the IMF and the OECD as well as the EU and Sweden's own central bank (Riksbanken).
But the Swedish government said on Wednesday it was not considering scrapping the controversial tax breaks.
“Interest deductions have been around a long time. We've got them now and have no plans to change them. You have to take into account how it would hit the economy for many households,” Finance Minister Magdalena Andersson told public broadcaster SVT.
An analyst at the Swedish Homeowners Association (Villaägarnas Riksförbund), the organization working to promote and protect the interests of property owners in Sweden, told The Local that scrapping the tax deductions could in fact exacerbate the housing crisis.
“The value of properties would effectively fall by 30 percent,” said chief economist Daniel Liljeberg, adding that it would cause problems for existing homeowners because the value of their properties would no longer be worth enough to cover their loans, should they need or wish to sell up.
“What would you do then? Households would go bankrupt.”
The debate was reignited ahead of Prime Minister Stefan Löfven revealing some of the policies set to feature in his autumn budget later this year.
While maintaining the tax breaks is not opposed by the main centre-right Alliance parties in parliament, the Left Party has long fought to get rid of them and was set to be dismayed at the government's suggestion that they were here to stay.
The former communist group argues that scrapping the expensive mortgage interest tax deductions – which cost the government around 30 billion a year – could free up cash for welfare reforms.
“Many are worried about high debts and financial stability. But we see other reasons. The interest deductions take up a lot of space in the budget and there are great needs within the welfare system that we think are more important,” its finance spokesperson Ulla Andersson told the Dagens Nyheter newspaper last week.
Others have argued that the government should strike while Sweden's interest rates in general remain at record-low levels, easing the blow on homeowners.
“Households would hardly notice if you reduced the interest deduction, considering the big decrease in interest rates you've seen in the last half year,” Bengt Hansson of the National Board of Housing, Building and Planning told Svenska Dagbladet earlier this year.
However, Liljeberg insisted on Wednesday that Swedish households would feel the pinch if the calls of the EU, IMF and OECD were heeded.
“There is only one way to solve the current housing crisis and that is building new homes. I have fortunately not seen anyone suggest that you should get rid of the interest deductions in a day, but I have seen proposals for phasing them out over 10 years and that too is still very radical,” he said.