An IMF Working Paper published in December 2015 entitled Housing Price and Household Debt Interactions in Sweden makes some comments on the effects of the taxation system on these issues.
The study notes that household debt in Sweden is higher than other countries partly owing to a tax system that strongly favors debt-financed home ownership. The property tax was virtually abolished in 2008 and the tax deductibility of mortgage interest payments encourages home ownership as well as reducing the incentive to pay off the principal. Under the European Commission’s index for tax incentives for home ownership in 2014 the tax system in Sweden supports home ownership more than the systems of other European countries.
The study considers that tax deductibility of mortgage interest costs the government around 0.5% of GDP and is likely to benefit wealthy households the most. Reduction or phasing out of mortgage interest deductibility would have a moderate effect on housing prices, partly reflecting the current low interest rates. Even at somewhat higher interest rates the impact of phasing out the tax deduction would be manageable owing to rising income and net financial assets.
The Working Paper concludes that government policies have played a significant role in the current situation of housing and debt and that further action is needed. This could include phasing out mortgage interest deductibility which would help to ease demand pressures while having a manageable impact on house prices and slightly reducing household debt.
