House prices and indebtedness in Sweden : a model-based assessment of policy options.
Date: 2017-03-02
Institutions: Directorate-General for Economic and Financial Affairs
Subjects: Sweden, economic analysis, economic model, housing, housing policy, indebtedness, mortgage, price increase, property tax

ISSN 2443-8030 (online)

House Prices and 
Indebtedness in Sweden: 
a Model-based
Assessment 
of Policy Options

Matthias Burgert, Patrick D’Souza      
and Geert Vermeulen

ECONOMIC BRIEF 021 | DECEMBER 2016

EUROPEAN ECONOMY

EUROPEAN 
ECONOMY

Economic and 
Financial Affairs

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European Commission 

Directorate-General for Economic and Financial Affairs 

House Prices and Indebtedness  
in Sweden: a Model-based Assessment  
of Policy Options 

By Matthias Burgert, Patrick D'Souza and Geert Vermeulen 

Summary 

House  prices  and  mortgage  debt  in  Sweden  have  grown  steeply  over  the  last  two  decades.  This  has 
been  driven  partly  by  strong  fundamentals  but  also  by  the  favourable  tax  treatment  of  property 
investment  and  mortgage  borrowing,  as  well  as  particular  features  of  the  Swedish  mortgage  market 
(low amortisation rates and a high share of variable-rate mortgages) that reduce effective debt service 
costs. The steep rise in household indebtedness creates medium-term risks of a disorderly deleveraging 
process  that  could  have  an  adverse  impact  on  the  real  economy  and  potentially  the  banking  sector. 
Accordingly,  the  Commission  (COM(2016)  95  final/2)  identified  Sweden  as  experiencing  a 
macroeconomic imbalance deserving monitoring and policy action. 

In this Economic Brief, we simulate the macroeconomic impact of three potential policy options that 
could  help  to  address  Sweden's  house  price/mortgage  debt  dynamic:  (i)  a  tighter  mortgage 
amortisation requirement; (ii) abolishment of mortgage interest tax deductibility; (iii) higher recurrent 
property  taxes.  For  the  latter  two  measures,  the  incremental  tax  revenues  from  these  policies  are 
allocated to reducing labour taxation, so that the measures are ex ante budget-neutral. 

While specific quantitative outcomes of macroeconomic simulations should be interpreted with care, 
our  analysis  suggests  that  a  more  ambitious  mortgage  amortisation  requirement  could  significantly 
reduce  household  indebtedness,  with  no  meaningful  adverse  impact  on  growth,  jobs,  or  long-run 
housing investment, and that the two tax-related policy options could also help to reduce indebtedness 
while  raising  output,  consumption  and  employment.  All  three  policy  scenarios  have  the  (desirable) 
effect of weighing somewhat on long-run house price growth, without causing a ‘hard landing’ or an 
excessive reduction in long-run housing investment. 

Contact: Matthias Burgert, Models and Databases, matthias.burgert@ec.europa.eu;  Patrick D'Souza, 
Economies of the Member States III, patrick.d'souza@ec.europa.eu; Geert Vermeulen, Economies of 
the  Member  States  III,  geert.vermeulen@ec.europa.eu.  European  Commission,  Directorate-General 
for Economic and Financial Affairs. 

EUROPEAN ECONOMY                                                                                          Economic Brief 021 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Economy Economic Briefs                                                               Issue 021 | December 2016  

price 
Introduction: 
household debt developments 

house 

and 

generally 

Swedish  house  prices  have  risen  rapidly  and 
persistently  over  the  past  two  decades.  To  some 
extent this reflects a wider dynamic evident in many 
other economies as well, driven by low interest rates 
and 
conditions. 
Nevertheless, Sweden stands out for both the vigour 
and  resilience  of  its  property  price  boom.  Indeed, 
Sweden  is  one  of  very  few  European  countries  that 
have  experienced  strong  house  price  inflation  both 
before  and  after  the  global  financial  crisis,  without 
any significant corrections (Graph 1). 

favourable 

credit 

Graph 1: House price index (HPI) for Sweden and 
selected EU countries (2010 = 100) 

Source: Eurostat 

income  growth  coupled  with 

Sweden's  high  house  prices  partly  reflect  strong 
fundamentals,  notably  relatively  rapid  population 
structural 
and 
underinvestment  in  new  housing  and  supply  side 
inefficiencies 
2016). 
Taking  this  into  account,  prices  are  still  looking 
increasingly  overstretched,  with  recent  estimates 
pointing  to  a  potential  overvaluation  of  about  20%   
(European Commission, 2016). 

(European  Commission, 

One  key  factor  underpinning  Sweden's  remarkable 
house  price  growth  is  the  structure  of  its  mortgage 
contracts.  Historically, 
long 
maturities  (Graph  2)  and  generally  little  or  no 
obligation  to  amortise  the  loan  principal  over  time. 
Moreover,  mortgages  are  usually  tied  to  short-term 
three  out  of  four 
interest  rates,  with  around 

they  feature  very 

2 

households having a fixed interest term of less than 
one  year  (Finansinspektionen,  2016).  The  largely 
interest-only,  variable-rate  nature  of  Swedish 
mortgages effectively amplifies the financial impact 
of  the  historically  low  short-term  interest  rates 
currently  in  place  as  it  allows  households  to  take 
higher  loans  while  keeping  their  monthly  payments 
at the same or even decreasing level. 

Graph 2: Typical mortgage maturity (2015) 

Source: ESRB (based on survey) 

factor 

Another  key  contributing 
is  Sweden's 
relatively  generous  tax  treatment  of  (particularly 
debt-financed)  property  ownership,  especially  since 
a tax reform in 2008 that capped recurrent property 
taxes at a relatively low fixed amount. Sweden's tax 
revenues  from  property  relative  to  GDP  are  among 
the  smallest  in  the  EU  (Graph  3).  Additionally, 
Sweden is one of just three Member States (together 
with Denmark and the Netherlands) where mortgage 
tax-deductible. 
interest  payments 
Notably,  both  the  Netherlands  and  Denmark  have 
recently  introduced  some  reforms  to  reduce  the 
scope  and  amount  of  mortgage  interest  tax  relief 
(European Commission, 2016). 

remain 

fully 

In  light  of  the  low  cost  of  mortgage  credit  and  the 
associated  tax  advantages,  it  is  not  surprising  that 
Sweden's fast-paced property boom has gone hand in 
hand  with  a  steep  rise  in  mortgage  debt.  While 
household debt in most other Member States with a 
similar  housing  market  /  indebtedness  dynamic 
stabilised after the financial crisis, in Sweden it has 
continued  to  grow  (Graph  4),  reaching  179%  of 
disposable income as of end-2015 (Riksbank, 2016). 

 
 
 
 
 
 
 
 
 
 
European Economy Economic Briefs                                                               Issue 021 | December 2016  

Graph 3: Property taxes as % of GDP for Sweden (2014) 
                (incl. taxes payable on property transfer) 

Source: OECD 

Graph 4:   Household debt growth (indexed, 1999=100) 

Source: European Commission 

This  dynamic  of  rapidly  rising  property  prices 
coupled with high and steadily increasing household 
leverage makes the Swedish economy vulnerable to 
shocks (Riksbank, 2016; Finansinspektionen 2016b). 
If  there  was  a  significant  rise  in  mortgage  risk 
premiums  –  perhaps  triggered  by  a  sizeable  house 
price  correction,  a  wider  economic  slowdown 
accompanied by an uptick in non-performing loans, 
or higher funding costs for Swedish banks as market 
perceptions about their riskiness worsen – this could 
force 
their 
consumption  level  to  meet  rising  mortgage  interest 

households 

rapidly 

reduce 

to 

increase 

the  broader 

in  demand  and 

payments.  In  addition,  a  direct  "wealth  effect" 
associated  with  a  drop  in  value  of  housing  and 
financial  assets  could  also  be  expected  to  weigh  on 
household  consumption  (Chen,  2006).  The  ensuing 
in 
drop 
economic  uncertainty  could  weigh  on  growth  and 
lead  to  job  losses,  further  deteriorating  households' 
ability  to  service  their  mortgages.  The  latter  can 
in  a  disorderly  deleveraging 
potentially  result 
process  and  credit 
losses  for  Swedish  banks, 
triggering  further  mortgage  risk  premium  increases 
and 
the  adverse  economic 
dynamic  described  here.  Empirical  evidence  from 
house  price  cycles  in  other  countries  also  supports 
the  conclusion  that  high  household  indebtedness 
tends  to  foreshadow  deeper  economic  downturns 
and  weaker  recoveries  following  a  housing  market 
slump (Crowe et al., 2011). 

thus  exacerbating 

from 

policy 

Accordingly,  several  Swedish  and 
international 
institutions have identified Sweden's house price and 
indebtedness  developments  as  an  area  that  could 
action 
robust 
benefit 
(Finansinspektionen, 
2016; 
2016b;  Riksbank, 
Finanspolitiska Rådet, 2016; European Commission, 
2016;  IMF  2015).  Potential  policy  measures  should 
be designed to achieve a gradual realignment of debt 
and house price levels with economic fundamentals, 
landing"  scenario  or 
while  avoiding  a  "hard 
otherwise  causing  a  disruptive  shock 
the 
economy. 

to 

include 

Sweden,  partially  in  response  to  country-specific 
recommendations  received  in  the  context  of  the 
European  Semester  since  2011,  has  already  taken 
some  policy  steps  to  address  its  house  price  / 
the 
dynamic.  These 
indebtedness 
introduction of a loan-to-value (LTV) ceiling of 85% 
for mortgages in 2010, the gradual raising of banks' 
risk  weight  floors  for  mortgages  in  2013  and  2014, 
and an amortisation requirement for new mortgages 
until the LTV reaches 50%1, which came into force 
in  June  2016.  While  the  precise  effect  of  these 
measures 
to  assess 
(particularly  for  the  new  amortisation  rule,  which 
came into force only recently), it does seem that they 
have  had  relatively  limited  impact  so  far,  with 
Swedish  house  prices  and  household  indebtedness 
continuing their relentless rise. 

in  some  cases  hard 

is 

3 

 
 
 
 
 
 
 
 
 
 
 
 
European Economy Economic Briefs                                                               Issue 021 | December 2016  

Model-based  assessment  of  potential 
policy measures 

Introduction 

For  the  model-based  assessment  of  the  policy 
measures  we  use 
the  European  Commission's 
QUEST model.2 QUEST is a global macroeconomic 
model  developed  for  policy  analysis  and  research.  
The  model  used  in  this  paper  consists  of  three 
regions:  Sweden,  the  euro  area  and  the  rest  of  the 
world.  All  three  regions  are  calibrated  to  match 
essential  properties  of  national  accounts  data  and 
bilateral trade linkages between the regions.  

type  are 

In each region, the model distinguishes between two 
types  of  households  that  both  own  houses,  but 
finance  their  property  acquisition  differently.  The 
first  type,  referred  to  as  "financially  unconstrained" 
households or simply as "outright homeowners", do 
not require a mortgage to purchase their home3. The 
second 
"credit-constrained"  or 
"mortgaged"  households,  who  can  finance  their 
housing  stock  only  by  taking  up  a  mortgage.  The 
model allows simulation of a scenario in which both 
types  of  households  pay  a  recurrent  property  tax, 
levied  at  a  flat  rate  on  the  housing  stock.  The  tax 
deductibility  of  mortgage 
is 
modelled  as  a  government  subsidy  to  mortgaged 
households to their mortgage interest rate.4  

interest  payments 

the 

a 

(i) 

scenario 

increases 

tighter  mortgage 

We  model  the  following  potential  policy  reforms, 
which  broadly  correspond 
to  recommendations 
Sweden  received  as  part  of  EU  macroeconomic 
surveillance  procedures  (European  Commission, 
2016): 
amortisation 
requirement  (relative  to  the  amortisation rule  put  in 
place in June 2016, as described above), (ii) a reform 
of  mortgage  interest  tax  relief  (with  the  tax  savings 
used to lower labour taxes) and (iii) a direct tax shift 
from  labour  to  recurrent  property  taxes.  The  tighter 
the 
mortgage  amortisation 
adjustment  speed  in  mortgage  debt  holdings  of 
credit-constrained  households, 
a 
reduction  of  their  aggregate  loan-to-value  ratio.  In 
the  mortgage  interest  tax  relief  reform  scenario,  we 
assume  full  abolition  of  the  government  subsidy  to 
mortgage  debt.  Ex  ante  the  government  neutralises 
this  financially  by  lowering  the  tax  on  personal 
income  –  an  assumption  we  make  to  optimise  the 
broader  economic  impact  of  this  tax  reform,  as 
labour  taxes  in  particular  have  been  identified  as 
among 
taxation 
(European Commission, 2014). Similarly, in the tax 
shift  scenario,  the  government  shifts  revenue  from 
personal  income  taxes  to  the  recurrent  property  tax 
on  housing.  Both  fiscal  reforms  are  ex-ante  budget 

the  most  distortive 

types  of 

resulting 

in 

neutral. Ex-post, the government budget balance can 
deviate  from  its  target  (at  which  the  debt-to-GDP 
ratio is stabilised in the short to medium run) owing 
to second round effects of the reforms on tax bases. 
In  the  long  run,  the  personal  income  tax  rate  is 
adjusted to stabilise the debt ratio.5  

in 

these 

The general equilibrium nature of the QUEST model 
allows us to focus on a multitude of macroeconomic 
variables 
reform  scenarios.  We  are 
particularly  interested  in  the  evolution  of  house 
prices,  household  debt,  employment,  consumption 
and  GDP.  While  we  do  not  undertake  a  welfare 
analysis,  distributional  questions  within  the  context 
of this Economic Brief can be addressed through the 
relative  evolution  of 
the  housing  stock  and 
consumption levels of the two types of households.6 

exhibit 

inevitably 

Specific  quantitative  outcomes  of  our  analysis 
should  be  interpreted  with  care.  Macroeconomic 
simulations 
require  certain  stylised 
assumptions  to  be  made  and  by  definition  abstract 
from  sentiment  effects  that  may  result  from  the 
introduction  of  significant  reforms.  More  generally, 
we  assume  that  households  are  rational  economic 
agents  planning  their  consumption  and  investment 
decisions over a long time horizon; in reality, some 
households  may 
"myopic"  planning 
behaviour, which could amplify the impact of policy 
changes  in  certain  scenario  (Berg  and  Hansen, 
2014). It is therefore important to emphasise that the 
purpose  of  these  simulations  is  primarily  to  further 
our  understanding  of 
the  underlying  dynamics 
through which the various policy scenarios affect the 
housing  market,  household  debt  and  the  broader 
economy.  Related  to  this,  and  taking  into  account 
quantitative  estimates  from  a  range  of  other  studies 
as  well,  we  also  aim  to  get  a  general  indication  of 
the  relative  impact  of  the  different  policy  options 
and their respective benefits and drawbacks.  

Tighter mortgage amortisation 

Graph  5  shows  the  simulated  impact  of  the  tighter 
mortgage  amortisation  policy  scenario  on  key 
economic and housing market indicators. The reform 
is  designed  to  yield  a  10%  reduction  in  the 
mortgage-debt-to-GDP ratio in the long run. We find 
that  this  requires  an  incremental  increase  in  the 
average  amortisation  rate  corresponding  to  0.6%  of 
outstanding mortgage debt per year7. 

As  a  consequence  of  larger  mortgage  repayments 
households  with  a  mortgage  will  spend  somewhat 
less  on  acquiring  a  property:  their  level  of  housing 
investment  drops by  3.5-4%  relative  to the  baseline 

4 

 
 
 
 
 
 
 
 
European Economy Economic Briefs                                                               Issue 021 | December 2016  

in  the  short  and  medium-run.  This  drop  in  demand 
marginally weighs on house prices, which raises the 
attractiveness  of  housing  as  an  investment  for 
financially  unconstrained  households.  As  a  result, 
these  households  will  modestly  increase  their  level 
of  housing  investment,  thus  partly  offsetting  the 
drop  in  housing  demand  from  credit-constrained 
households. 

The  higher  mortgage  repayments  for  mortgaged 
households  also  reduce  their  consumption  level. 
Within  the  model  the  resulting  drop  in  aggregate 
demand  is  triggering  a  somewhat  softer  monetary 
policy  stance  (relative  to  the  baseline).  On  the 
margin,  this  stimulates  outright  homeowners  to 
the  overall 
thus  cushioning 
consume  more, 
impact  on 
fall.  The  aggregate 
consumption 
consumption is therefore minor and – thanks in part 
to  the  reduction  in  household  debt  (and  thus 
mortgage  payments)  gradually  resulting  from  the 
faster  amortisation  rate  –  in  the  long-rung  even 
positive.  Another  important  contribution  for  the 
latter 
aggregate 
the 
consumption  is  stimulated  further  by  a  reduction  in 
long-run.  This 
personal 
reduction compensates in the government budget for 
the lower subsidies paid to households on mortgage 
interest.  It  is  one  important  reason  for  GDP  and 
employment effects being positive in the long run as 
well.  

income 

stems 

taxes 

from 

fact 

that 

the 

in 

From a distributional point of view this reform gives 
a mixed picture: during the deleveraging process the 
reform is regressive (both in terms of housing stock 
and  consumption  levels),  however,  it  is  progressive 
in the long run. 

the  enhanced  amortisation 

leads 
Finally, 
mortgage  debt  to  gradually  shrink  compared  to  the 
baseline  level,  resulting  (by  design)  in  a  long-run 
reduction in household debt of 10% of GDP. 

rate 

In  short,  the  simulations  suggest  that  a  more 
ambitious  mortgage  amortisation  requirement  could 
lead  to  a  meaningful  long-run  debt  reduction  at  a 
limited  cost  in  terms  of  output,  consumption  and 
employment – and without causing a "hard landing" 
in house prices or depressing long-run growth of the 
housing stock.  

Mortgage interest tax relief reform 

Graph 6 shows the simulated impact of a permanent 
abolishment  of  mortgage  interest  tax  deductibility, 

5 

with  the  resulting  tax  savings  (amounting  to  about 
0.6% of GDP) used to reduce personal income taxes. 

Since mortgage interest tax relief effectively acts as 
a  subsidy  to  mortgage  rates,  the  elimination  of  this 
tax  deduction  significantly  increases  the  financing 
costs  for  housing  investment  by  credit-constrained 
households.  As  an  immediate  reaction,  they  reduce 
the level of housing investment by about 6%, which 
gradually  tapers  off  over  time.  Similar  to  the 
previous policy scenario, this has a modest negative 
impact  on  property  prices,  thus  attracting  increased 
unconstrained 
from 
investment 
households into the housing market. 

financially 

Over  time,  this  shifting  housing  investment  pattern 
results  in  a  gradual  redistribution  of  a  small  part  of 
the  housing  stock  from  mortgaged  households 
(whose housing stock ownership declines by 2%) to 
outright  home-owning  households  (whose  housing 
stock increases by 1.2%). There is virtually no long-
term net effect on the size of the aggregate housing 
stock. 

Since  the  tax  revenues  from  the  mortgage  interest 
relief removal are fully used to reduce labour taxes, 
the financial impact of losing the subsidy for credit-
constrained  households  is  partially  offset  by  higher 
after-tax employment income. Still, the net effect for 
this group is an initial drop in consumption spending 
of  up  to  1.7%  relative  to  the  baseline,  softening  to 
about  1.5%  in  the  long-run.  For  the  outright  home-
owners,  the  labour  tax  reduction  leads  to  a  gain  in 
income  and  consumption.  In  aggregate,  household 
consumption  picks  up  gradually.  Thanks  to  the 
growth-friendly  impact  of  reducing  the  labour  tax 
wedge,  in  the  long  run  this  reform  has  a  modest 
and 
positive 
employment.  

effect  on  GDP, 

consumption 

The distributional implications of this reform appear 
regressive  with  respect  to  consumption  and  the 
housing  stock.  However,  this  is  linked  to  the 
modelling assumption that financially unconstrained 
households never incur any mortgage debt, whereas 
in  reality  relatively  wealthy  Swedish  households 
often  do  have  mortgages  (for  instance  for  tax 
planning  purposes).  A  microanalytical  approach 
does  indeed  lead  to  the  conclusion  that  in  practice 
this  reform  would  have  a  progressive  distributional 
impact (Englund, 2016). 

As can be expected of a policy option that removes a 
subsidy on mortgage borrowing, long-run household 
indebtedness  is  projected  to  drop  relative  to  the 
baseline scenario (by 1.3% of GDP).   

 
 
 
 
European Economy Economic Briefs                                                               Issue 021 | December 2016  

Recurrent property tax reform 

Graph 7 shows the simulated impact of the recurrent 
property tax policy scenario. The reform is designed 
to  shift  government  revenue  from  labour  taxes  into 
recurrent property taxes by about 0.6% of GDP (i.e., 
calibrated to the same effective size as the mortgage 
interest  deductibility  reform  discussed  above).  This 
is  estimated  to  amount  to  an  average  increase8  in 
annual  property  taxes  of  about  0.3%  of  residential 
property values. 

reduce 

comparatively 

housing  wealth 

Since  an  uncapped  recurrent  property  tax  makes 
owning 
less 
attractive,  the  tax  shift  will  lead  households  to 
significantly 
level  of  housing 
their 
investment.  This  lowers  house  prices  by  2-2.5% 
compared  to  the  baseline.  The  drop  in  house  prices 
the  acquisition  of  housing  cheaper  for 
makes 
households  needing  a  mortgage.  Accordingly,  these 
households  respond  to  the  drop  in  prices  –  also 
helped  by  higher  employment  incomes  resulting 
from  lower  labour  taxes  –  by  investing  somewhat 
more  in  housing  compared  to  the  base  case.  This 
partially  offsets 
from 
financially  unconstrained  households.  In  aggregate, 
the reduction in housing investment amounts to 1.5-
2.9% in the short to medium-run, gradually levelling 
off to 1.8% over longer time horizons.  

investment 

lower 

the 

The growth-friendly effect of the reduced labour tax 
wedge  helps  raise  incomes,  allowing  households  to 
increase  their  consumption  level.  In  the  short  and 
medium-run,  this  effect  is  minor  for  households 
needing  a  mortgage,  because  they  allocate  most  of 
their  income  gain  to  increased  housing  investment. 
However,  over  the  longer  run,  both  types  of 
households  benefit  from  increased  consumption  of 
about  0.4%.  The  reduction  in  labour  taxes  also 
results in a small boost to GDP and employment. 

the 

has 

reform 

stock  of  constrained  households 

Consequently, 
favourable 
distributional  implications  in  the  long  run.  While 
both  consumption  levels  grow  at  the  same  rate,  the 
housing 
is 
increasing while that of unconstrained households is 
decreasing. Intuitively, this reform is a redistribution 
of  the  tax  burden  from  labour  to  home  ownership. 
Given  that  in  our  model  outright  home  owners 
possess  a  larger  housing  stock  on  average  than 
mortgaged  households,  they  are  also  much  more 
affected  by  the  increase  in  the  recurrent  property 
taxes.  At  the  same  time  the  personal  income  tax 
reduction affects all households to the same extent.  

Unlike  the  two  other  policy  scenario,  the  tax  shift 
option  does  not  directly  target  mortgage  debt. 
However,  the  resulting  reduction  in  house  prices, 
combined  with  slightly  higher  output,  does  help 
reduce  household  indebtedness  as  a  percentage  of 
GDP by about 0.8%. 

Comparison 
implications 

and 

possible 

policy 

Table 1 compares the medium and long-term impact 
of the three simulated policy scenarios.  

three  policy  options  ultimately 
Although  all 
contribute  to  lowering  household  debt,  the  quickest 
and largest impact can be achieved by mechanically 
forcing  a  gradual  reduction  via  a  more  ambitious 
amortisation  requirement.  The  simulations  suggest 
this  can  be  done  with  little  or  no  adverse  long-run 
impact on growth, house prices and the overall size 
of the housing stock.  

The main benefit of the tax-related policy options on 
the  other  hand  is  their  growth-friendly  nature, 
translating  into  improved  prospects  for  output, 
employment  and  consumption.  In  both  cases  the 
long-run impact is projected to be fairly modest but 
still  significant:  as  an  example,  for  both  measures 
the  long-run  employment  increase  is  equivalent  to 
about  10 000  new  jobs  created  (an  increase  of 
roughly  0.2%  in  the  employment  rate).  In  the 
recurrent property tax policy option, these gains are 
projected  to  materialise  more  quickly  than  in  the 
case  of  mortgage  interest  relief  removal,  where 
household consumption is only increasing gradually. 
In  addition,  the  recurrent  property  tax  reform 
scenario  makes  a  bigger  contribution  to  stemming 
house price growth (but still without causing a "hard 
landing"). On the other hand, it has the disadvantage 
that it reduces housing investment, and therefore the 
size of the housing stock, somewhat in the long run. 
In  contrast,  the  abolition  of  mortgage  interest  relief 
merely  leads  to  a  small  redistribution  between  the 
different 
types  of  home-owners,  without  a 
significant overall impact on the housing stock. 

theme 

Overall,  the  simulations  offer  support  for  the  more 
that  an  appropriate  mix  of 
general 
macroprudential  policies  and 
targeted  property 
taxation  reforms  can  assist  in  keeping  house  price 
and  indebtedness  developments  in  check  in  a 
growth-  and  employment-friendly  manner.  Several 

6 

 
 
 
 
 
 
European Economy Economic Briefs                                                               Issue 021 | December 2016  

other EU member states with similar house price and 
mortgage  debt  dynamics  as  Sweden  have  indeed 
implemented  this  type  of  reforms  in  recent  years 
(European  Commission,  2016).  As  noted  above, 
Sweden  itself  has  also  taken  steps  in  this  general 
direction  (loan-to-value  ceiling;  limited  mandatory 
amortisation  for  new  mortgages).  Our  analysis 
suggests 
that  a  more  ambitious  amortisation 
requirement  combined9  with  reforms  to  mortgage 
taxation 
tax 
are 
and/or  property 
worthwhile  further  policy  options 
to  consider. 
However,  to  resolve  Sweden's  broader  housing 
market  issues,  such  demand-side  measures  would 
need to be complemented by a wider-reaching policy 
package 
for  new 
that  addresses  bottlenecks 
construction  and  efficient  usage  of  the  existing 
housing  stock  as  well  (European  Commission. 
2016). 

treatment 

Our results are broadly in line with previous studies 
(Table  2),  which  generally  also  point  towards  the 
overall conclusion that macroprudential policies can 
achieve comparatively large effects on indebtedness 
with  little  or  no  macroeconomic  cost10.  In  addition 
to  the  macroeconomic  impact  of  recurrent  property 
taxes  and  mortgage  interest  deductibility  reforms, 
the  redistributive  effect  of  these  policies  across 
income  deciles  has  been  studied  as  well:  Englund 
(2016),  using  a  microsimulation  model,  finds  that 
the income impact for most individual households is 
modest  and  that  the  overall  outcome  is  broadly 
progressive. 

two 

owners 

the  same  split  between 

In  terms  of  modelling  technique  our  approach 
compares best to Finocchiaro et al. (2016). Both the 
QUEST model and the model Finocchiaro et al. use 
types  of 
feature 
and  mortgaged 
households, 
home 
households,  which  both  finance 
their  property 
acquisition differently. Furthermore, both models are 
calibrated  based  on  the  same  evidence.  However, 
major  differences  remain,  namely  the  assumptions 
made  on  the  supply  of  housing  services  and  our 
assumption  that  the  government  uses  its  additional 
budgetary  room  (from  lower  subsidies  to  mortgage 
debt) to lower personal income taxes.11 This to some 
extent explains the discrepancy in size of the effects 

of  reforms  on  house  prices  and  consequently  the 
mortgage-debt-to-GDP ratio.  

Conclusion 

We  consider  three  potential  macroprudential  and 
taxation-related  policy  options  to  address  the  rapid 
growth of house prices and indebtedness in Sweden 
and simulate their macroeconomic impact using the 
European Commission's QUEST model.  

that  a  more  ambitious  mortgage 
We  show 
amortisation  requirement  could  significantly  reduce 
household indebtedness, with no meaningful adverse 
impact  on  growth,  jobs  and  long-run  housing 
investment.  

to 

the 

interest 

taxation  of  housing  assets  – 
Reforms 
specifically,  abolition  of  mortgage 
tax 
deductibility or introduction of meaningful recurrent 
property  taxes  –  can  also  help  reduce  indebtedness. 
However,  the  main  benefit  of  these  policies  is  that 
the  additional  tax  revenues  created  can  be  used  to 
reduce  labour  taxes,  which  raises  long-run  output, 
consumption  and  employment.  While  care  must  be 
taken  in  interpreting  specific  quantitative  results 
from  any  macroeconomic  modelling  exercise,  our 
simulations  suggest  that  these  tax  reforms  could 
boost consumption by a 0.3-0.4% and create around 
10 000  new  jobs  over  time.  From  a  distributional 
point  of  view  the  reform  that  shifts  the  tax  burden 
from labour to housing wealth is most beneficial.  

Notably, although all three policy scenarios have the 
(desirable) effect of weighing somewhat on long-run 
house  price  growth,  our  simulations  show  that  they 
do not lead to any "hard landing". Similarly, none of 
these policy options results in an excessive reduction 
in  long-run  housing  investment  (although  there  is  a 
modest drop in the case of recurrent property taxes). 

In  conclusion,  we  find  that  a  more  ambitious 
mortgage  amortisation  requirement  and/or  targeted 
mortgage  tax  deductibility  and  property  taxation 
reforms  can  help  restrain  Sweden's  house  price  and 
indebtedness dynamic in a growth-and employment-
friendly manner.  

7 

 
 
 
 
 
 
European Economy Economic Briefs                                                               Issue 021 | December 2016  

Chart 5: Tighter amortisation requirement policy option: simulated impact vs. baseline (years 1-10 and long-run) 

0.06

%

GDP

Employment

1.0

%

Consumption (tot.)
Consumption (unconstr. HH)
Consumption (mortgaged HH)

1

2

3

4

5

6

7

8

10 LR

9
Years

0.04

0.02

0.00

-0.02

-0.04

-0.06

-0.08

-0.10

-0.12

1.0

%

0.0

-1.0

-2.0

-3.0

-4.0

-5.0

1

2

3

4

5

6

7

8

10 LR

9
Years

Housing investment (tot.)
Housing investment (unconstr. HH)
Housing investment (mortg. HH)

Source: Commission analysis 

Housing stock (tot.)
Housing stock (unconstr. HH)
Housing stock (mortgaged HH)

0.4

%

0.2

0.0

1

2

3

4

5

6

7

8

9

10 LR

1

2

3

4

5

6

7

8

Years

10 LR

9
Years

1

2

3

4

5

6

7

8

10 LR

9
Years

Mortgage debt (%GDP)

House Prices (RHS)

-0.2

-0.4

-0.6

-0.8

0.00

-0.02

-0.04

-0.06

-0.08

-0.10

-0.12

-0.14

% GDP

%

-0.16

0.5

0.0

-0.5

-1.0

-1.5

-2.0

0.0

-2.0

-4.0

-6.0

-8.0

-10.0

-12.0

Chart 6: Mortgage interest tax deductibility abolition policy option: simulated impact vs. baseline (years 1-10 and long-run) 

Housing stock (tot.)
Housing stock (unconstr. HH)
Housing stock (mortgaged HH)

1

2

3

4

5

6

7

8

10 LR

9
Years

0.30

%

GDP

Employment

1.5

%

Consumption (tot.)
Consumption (unconstr. HH)
Consumption (mortgaged HH)

1.5

%

0.25

0.20

0.15

0.10

0.05

0.00

3.0

2.0

1.0

0.0

-1.0

-2.0

-3.0

-4.0

-5.0

-6.0

-7.0

1

2

3

4

5

6

7

8

9

10 LR

Years

%

1

2

3

4

5

6

7

8

10 LR

9
Years

Housing investment (tot.)
Housing investment (unconstr. HH)
Housing investment (mortg. HH)

Source: Commission analysis 

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

-2.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

0.0

-0.2

-0.4

-0.6

-0.8

-1.0

-1.2

-1.4

1

2

3

4

5

6

7

8

10 LR

9
Years

1

2

3

4

5

6

7

8

10 LR

9
Years

Mortgage debt (%GDP)

House Prices (RHS)

0.0

-0.1

-0.2

-0.3

-0.4

-0.5

% GDP

%

-0.6

8 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
European Economy Economic Briefs                                                               Issue 021 | December 2016  

Chart 7: Recurrent property tax reform policy option: simulated impact vs. baseline (years 1-10 and long-run) 

0.18

%

GDP

Employment

%

0.5

Consumption (tot.)
Consumption (unconstr. HH)
Consumption (mortgaged HH)

%

Housing stock (tot.)

Housing stock (unconstr. HH)

Housing stock (mortgaged HH)

1

2

3

4

5

6

7

Years
8
9

10 LR

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

-2.5

-3.0

-3.5

-4.0

0.16

0.14

0.12

0.10

0.08

0.06

0.04

0.02

0.00

2.0

1.0

0.0

-1.0

-2.0

-3.0

-4.0

-5.0

-6.0

-7.0

1

2

3

4

5

6

7

8

9

10 LR

Years

3.0

%

Housing investment (tot.)
Housing investment (unconstr. HH)
Housing investment (mortg. HH)

1

2

3

4

5

6

7

8

9

10 LR
Years

Source: Commission analysis 

0.4

0.3

0.2

0.1

0.0

-0.1

0.0

-0.1

-0.2

-0.3

-0.4

-0.5

-0.6

-0.7

-0.8

1

2

3

4

5

6

7

10 LR

9

8
Years

1

2

3

4

5

6

7

8

10 LR

9
Years

Mortgage debt (%GDP)

House Prices (RHS)

-1.9

-2.0

-2.1

-2.2

-2.3

-2.4

-2.5

% GDP

%

-2.6

8 

 
 
 
 
 
 
European Economy Economic Briefs                                                               Issue 021 | December 2016  

Table 1: Medium- and long-run impact of simulated policy scenarios 

Tighter amort-
isation requirement 

Mortgage tax relief abolition 

Recurrent property tax 

Medium-
term impact 
(5 years) 

GDP1 
Employment1 
Consumption1 
House prices1 
Housing stock1 

Long-run 
impact3 

Household debt / GDP2 
GDP1 
Employment1 
Consumption1 
House prices1 
Housing stock1 
Household debt / GDP2 

0.0 

0.0 

-0.2 

-0.1 

-0.1 

-1.5 

0.0 

0.0 

0.1 

-0.1 

0.2 

-10.2 

0.2 

0.2 

0.2 

-0.4 

-0.1 

-0.1 

0.2 

0.2 

0.3 

-0.5 

0.0 

-1.2 

0.1 

0.2 

0.3 

-2.5 

-0.3 

-0.2 

0.1 

0.2 

0.4 

-2.5 

-1.8 

-0.8 

Notes: 
1) GDP, employment, consumption, house prices and housing stock: impact expressed as percentage of base-case level. 
2) Household debt / GDP: impact expressed in percentage points  
3) See endnote 5 for further background on the meaning of "long-run" in our macroeconomic modelling framework. 

Source: Commission analysis 

9 

 
 
 
  
 
 
 
 
European Economy Economic Briefs                                                               Issue 021 | December 2016  

Table 2: Comparison with other studies 

Study 

Modelling approach 

Relevant policy scenarios analysed 

Chen, J. and 
Columba, F. (2016) 

DSGE model 

Lower loan-to-value (LTV) ceiling  
(from 85% to 80% for new loans) 

Tighter amortisation requirement  
(from 50 to 45 years) 

Long-run impact on… 

Debt / 
GDP 

GDP 

House 
prices 

-10% 

-0.5% 

-1.5% 

-10% 

-0.4% 

-0.5% 

Mortgage interest deductibility (MID) reduced 
(from 30% to 25%) 

-2.2% 

+0.1% 

Finocchiaro, D. et 
al. (2016) 

DSGE model 

Lower LTV ceiling  
(from 75% to 69.5% for new loans) 

Tighter amortisation requirement 
(from 50 years to 45 years) 

MID largely eliminated  
(from 30% to 6.2%) 

-10% 

-0.4% 

-1.6% 

-10% 

-0.3% 

-0.4% 

-10% 

+0.3% 

-3.6% 

Loan-to-disposable-income (LTI) ceiling   
(drop from 483% to 426% of disposable income) 

-10% 

-0.3% 

0% 

Riksbank (2014) 

Two DSGE models and in-
house Riksbank forecasting 
model1  

Tighter amortisation requirement  
(from average of 56 years to 35 years) 

-31% 

-0.1% 

-0.2 to  
-0.9% 

Tighter amortisation requirement  
(LTV-based2) 

-13% 

-0.1% 

-0.3% 

European 
Commission (2014) 

DSGE model (QUEST) for 
generic case (not calibrated to 
Sweden) 

Tax shift: recurrent property taxes (1% of GDP) 
used to reduce wage tax wedge 

0% 

-3% 

MID eliminated 

0% 

-0.2% 

Hull (2015) 

Life-cycle model 

Svensson (2016) 

Life-cycle model 

Tighter amortisation requirement  
(LTV-based2) 

Tighter amortisation requirement  
(2% / year, versus no amortisation at all) 

-1.2 to  
-2.8% 

+4 to  
+7% 

Notes: 

1) Results shown are average for three models 

2) These studies refer to the LTV-based amortisation requirement that was ultimately implemented in July 2016, but that was still 
under consideration at the time of publication (see end note 1 for details). The impact estimates from these studies should be 
interpreted versus a baseline reflecting the typical mortgage structure at the time, with amortisation normally purely voluntary for 
most lower-LTV loans, whereas most mortgage contracts for high-LTV loans provided for initial amortisation rates of 1-3% per 
annum until the LTV drops below a pre-specified threshold (typically 70%). Hull (2015) assumes as a baseline an initial 
amortisation rate of 1% per annum for high-LTV loans, whereas Svensson (2016) uses completely voluntary amortisation as a 
benchmark scenario. 
3) The above studies differ in their modelling strategy. The sometimes fundamentally different approach can explain to some extent 
the heterogeneity in results. Endnotes 10 and 11 provide a brief explanation of model specificities for the models used by Hull 
(2015), Svensson (2016) and Finocchiaro et al. (2016). 

10 

 
 
 
  
  
  
 
  
  
  
  
 
 
  
  
  
  
  
  
 
 
  
 
 
 
 
  
 
 
 
 
 
 
 
 
 
European Economy Economic Briefs                                                               Issue 021 | December 2016  

References 

Berg  J.  and  Hansen  S.  (2014),  "Åtgärder  mot  hushållens  skuldsättning  –  amorteringskrav",  Finansinspektionen 
memorandum FI-dnr 14-15503. 

Chen  J.  and  Columba  F.  (2016).  "Macroprudential  and  Monetary  Policy  Interactions  in  a  DSGE  Model  for 
Sweden", IMF Working Paper WP/16/74. 

Chen J. (2006). "Re-evaluating the association between housing wealth and aggregate consumption: new evidence 
from Sweden", Journal of Housing Economics, doi:10.1016/j.jhe.2006.10.004. 

Crowe C., Dell'Ariccia G., Igan D. and Rabanal P. (2011), "How to Deal with Real Estate Booms: Lessons from 
Country Experiences", IMF Working Paper WP/11/91. 

Englund,  P.  (2016).  "En  mer  neutral  kapitalbeskattning  –  Fördelningseffekter  av  begränsade  ränteavdrag", 
Rapport till Finanspolitiska rådet 2016/3 

European Commission (2014). "Tax Reforms in EU Member States, 2014 Report", European Economy 6/2014. 

European Commission (2016), "Country Report Sweden 2016", Commission Staff Working Document (2016) 95. 

Finansinspektionen (2016), The Swedish Mortgage Market (2016), Ref. 16-3183. 

Finansinspektionen (2016b), Stability in the Financial System, Ref. 16-5491. 

Finanspolitiska Rådet (2016), "Svensk finanspolitik", Finanspolitiska rådets rapport 2016. 

Finocchiaro D., Jonsson M., Nilsson C. and Strid I. (2016), "Macroeconomic effects of reducing household debt", 
Sveriges Riksbank Economic Review 2016:2. 

Hull,  I.  (2015).  "Amortization  Requirements  and  Household  Indebtedness:  An  Application  to  Swedish-Style 
Mortgages", Riksbank Working Paper 298. 

International Monetary Fund (2015), Sweden – Staff report for the 2015 Article IV consultation. 

Ratto M., Roeger W., in 't Veld J. (2009), "QUEST III: An estimated open-economy DSGE model of the euro area 
with fiscal and monetary policy", Economic Modelling 26, 222–233. 

Svensson,  L.  (2016).  "Amortization  Requirements  May  Increase  Household  Debt:  A  Simple  Example",  IMF 
Working Paper 16/83. 

Sverige Riksbank, Financial Stability Department (2016). Financial Stability report 2016:2. 

Sverige  Riksbank,  Financial  Stability  Department/Monetary  Policy  Department  (2014).  "Amortisation 
requirements – a step towards more sustainable debt development", Report to the Financial Stability Council. 

11 

 
 
 
European Economy Economic Briefs                                                               Issue 021 | December 2016  

1 Specifically, the new mortgage amortisation requirement imposes a minimum amortisation rate of 2% per annum for newly 
agreed mortgages with an LTV above 70%, which drops to 1% per annum for mortgages with an LTV below 70% but above 
50%. Once a mortgage has been paid down to an LTV below 50%, no further amortisation is required. 
2 More information on QUEST-based analysis can be found here:  
http://ec.europa.eu/economy_finance/research/macroeconomic_models_en.htm.  
For an estimated version of the model see Ratto, M., Roeger, W., and in 't Veld, J. (2009). 
3 In more technical terms, these are the so-called "Ricardian households", who are financially unconstrained and fully able to 
intertemporally optimize their consumption and housing investment.  
4  We  calibrate  the  QUEST  model  to  the  mortgage-debt-to-GDP  ratio  of  the  Swedish  economy.  Respecting  this  makes  the 
modelling  results  less  sensitive  to  a  change  in  the  split  between  mortgaged  households  and  outright  home-owners. 
Intuitively,  an  increase  in  the  baseline  in  the  share  of  mortgaged  households  requires  a  reduction  in  the  individual 
households'  mortgage  debt  level  to  assure  the  same  aggregate  mortgage-debt-to-GDP  ratio.  The  individual  mortgaged 
household subsequently reacts less strongly to debt sensitive reforms as it is exposed to less debt. This counterbalances the 
increased share of mortgaged households at the aggregate level.  
5 With "long run" we are labelling any time horizon beyond which price and wage adjustment in the model in response to a 
shock  is  concluded.  We  label  the  period  during  which  the  adjustment  in  model  variables  in  response  to  a  shock  is  taking 
place as "short" or "medium run".  
6 From a wealth perspective, financially unconstrained households can be considered richer than mortgaged households for 
several  reasons:  First,  unconstrained  households'  average  housing  stock  is  higher  than  that  of  constrained  households. 
Second,  unconstrained  households  own  additional  capital  which  they  invest  into  firms  thereby  generating  interest  and 
dividend revenue. Third, unconstrained households are the ultimate lenders of mortgage capital in the model economy.   
7 In the model, for technical reasons we make the assumption that the revised mortgage amortisation rate applies to both 
new  and  existing  mortgages.  In  practice,  it  may  be  more  straightforward  to  introduce  a  higher  amortisation  rate  only  for 
new  mortgages.  However,  the  long-run  impact  would  be  the  same  in  both  scenarios  in  any  case,  as  over  time  "new" 
mortgages will come to represent a gradually growing share (and ultimately 100%) of the total mortgage stock. 
8 Sweden currently has a type of recurrent property tax already (the "local property fee" or kommunal fastighetsavgift). The 
nominal  tax  rate  is  0.75%  of  assessed  value  for  most  houses  and  0.3%  for  most  apartments,  but  the  tax  is  capped  at  a 
relatively  low  level  (as  of  2016,  SEK  7 412  and  SEK  1 268  per  annum  for  houses  and  apartments  respectively).  In  practice, 
therefore,  most  owners  pay  a  flat  fee  that  does  not  scale  up  with  the  value  of  their  property.  There  are  also  various 
exemptions in place, e.g. for new-build properties, where no local property fee is charged. 
9 When the different simulated policy options are implemented in combination as part of a comprehensive policy package, 
in our model their respective impact on the relevant macroeconomic variables scales roughly linearly and can be summed 
up to obtain the estimated aggregate impact for the policy package as a whole. 
10  Specifically  for  mortgage  amortisation  policy  options,  Svensson  (2016)  and  Hull  (2015)  arrive  at  the  opposite  conclusion 
and  find  that  tighter  amortisation  requirements  would  lead  to  only  a  small  drop  or  even  an  increase  in  indebtedness. 
However, we believe that these studies do not fully reflect real-world constraints faced by mortgaged households (such as 
LTV  limits)  and  make  assumptions  regarding  borrower  behaviour  that  are  unlikely  to  materialise  in  practice  (e.g.,  that 
households would seek to artificially increase their initial borrowing level above what is needed for their house purchase). 
11 Finocchiaro et al. (2016) assume a fixed supply in housing services resulting in a strong sensitivity of house prices to reforms 
in  equilibrium.  In  the  QUEST  model  the  supply  of  housing  is  not  fixed,  but  housing  services  are  produced  by  a  residential 
construction  firm  that  transforms  a  combination  of  land  and  domestic  non-tradable  goods  into  new  houses.  Firms  in  the 
residential  construction  sector  are  monopolistically  competitive  and  face  price  adjustment  costs.  Furthermore,  the 
residential construction firm's decisions are influenced by the prices for its input factors.  

12 

 
 
 
 
 
                                                        
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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