Sweden grapples with massive household debt

STOCKHOLM , Nov 9 (Reuters): Sweden's new center-left government and its financial authorities are under huge pressure when they meet on Tuesday to tackle a mountain of household debt that is casting a long shadow over one of Europe's few economic bright spots.
Having slashed rates to zero to fight the risk of deflation, top Swedish officials are now in a quandary over how to rein in borrowing and house price rises without sending the real estate market into a downward spiral.
The country's AAA-rated economy is still one of Europe's strongest, with low public debt, sound state finances and banks among the best capitalized and most profitable in Europe.
But consumers, barely touched by the financial crisis, have loaded up on cheap mortgages and caused Swedish property prices to triple over the last 20 years, prompting a warning from the IMF that the market is 20 percent overvalued.
Adding to the problem: Sweden has built too few houses for the last 20 years and its capital Stockholm is one of Europe's fastest growing cities.
Critics say the former centre-right government added fuel to the fire by slashing real estate taxes and leaving 30 percent mortgage tax relief untouched.
Meanwhile, Sweden's household debt-to-income ratio has risen to above 170 percent - among Europe's highest.
The worry is that private consumption, nearly half of GDP, would suffer if rates rose or property prices fell.
"The longer we wait, the bigger the imbalances are," said Bengt Hansson, analyst at the Swedish National Board of Housing Planning and Building. "We already have a bubble, but we will avoid an even bigger bubble."
It will be hard to dissuade bullish Swedish consumers.
In Stockholm's frenzied housing market, buyers make multi-million crown offers to snap up flats they may only have seen in photographs. And cranes and scaffolding are common sights in suburbia as householders take advantage of generous tax breaks for home improvements.
"We don't think it will crash badly," said Peter, a 47 year-old investment advisor, who with his wife Maria has just bought a house in Stockholm for around 12 million Swedish crowns ($1.62 million).
"It might stop going up for a while, but over the longer term we expect it to go up," he added, suggesting the lack of housing and population growth in Stockholm would support prices.
Attempts by regulators so far to slow credit growth - squeezing banks by making them put aside more capital and draw up voluntary mortgage pay-down plans - have not worked because interest rates have continued to fall.
Last week the central bank cut rates to zero in an attempt to answer criticism that it is not doing enough to tackle another economic risk - deflation - even while it acknowledged the problem that would create in containing household debt.