Sweden’s Economy is Robust, but Faces Challenges in Housing, Labor Markets

  • Rising house prices call for reforms on both supply and demand sides
  • Strong fiscal position allows temporarily higher deficit to meet migrant-related spending
  • Riksbank’s stimulatory monetary policy needed to lift inflation to target
  • Speaking to IMF Survey at the launch of the IMF’s regular health check of the Swedish economy, mission chief Craig Beaumont said Sweden needed to address the structural problems in housing and labor markets to help sustain growth and stability. He also highlighted Sweden’s high priority given to further improving gender equity.

    IMF Survey : You recently led the IMF delegation that assessed the Swedish economy. What issue stood out while you were in Stockholm?

    Beaumont: House prices have been rising very quickly, hitting an annual rate of 18 percent recently, and by over 20 percent in Stockholm and Gothenburg. So, there was a lot of media interest in the range of measures we recommended to help address these surging prices. Sweden needs to increase competition in the construction sector, for example by improving how municipalities sell land and approve construction plans.

    There is also a need to use existing dwellings more efficiently. Two factors tend to “lock in” households to their current dwelling even if it is bigger than they need. First, rent controls, as no one wants to leave a rent-controlled apartment. Second, the capital gains tax. Here we suggested raising the amount that can be deferred when households move from one primary residence to another. We also said that now is a good time to phase out the tax deductibility of mortgage interest, which creates an incentive for debt-financed housing ownership.

    IMF Survey: Phasing out the mortgage interest deductibility may not be popular among the Swedish population and hard for politicians to move forward. How could this recommendation be made more palatable?

    Beaumont: Mortgage interest deductibility is hotly debated in Sweden and was the issue that attracted the most attention. Some countries, such as Ireland and Spain, have already phased out deductibility, and other countries are in the process of reducing it, like Finland, Denmark, and the Netherlands. This is a good time for Sweden to start a phase-out because interest rates are low, so the impact on a household’s pocketbook would be modest. Sweden’s strong fiscal position means that revenue gains from phasing out deductibility can be used for other purposes, such as subsidizing the...

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