“Sweden’s GDP is growing at a record pace. Optimism is strong in most areas. That can very well mean that house prices will continue to rise and that the risk of a housing bubble increases if measures aren’t taken,” wrote Liberal Party economic policy spokesperson Carl B. Hamilton in the Dagens Nyheter (DN) newspaper.

Reducing the tax break Swedish homeowners receive on the interest payments they make on their mortgages is a “soft” way to control rising house prices without stifling growth for “the whole economy and job development.” he argued.

Hamilton proposes reducing the current 30 percent tax break to 25 percent at the end of the year, calling such a measure “effective and targeted.”

“It would be less advantageous for households to borrow, but not for companies,” wrote Hamilton.

“If the housing bubble were instead managed by the Riksbank through higher interest rates, there is a risk that the entire Swedish economy would be cooled off more than desired.”

Hamilton’s proposal comes amid speculation that Sweden is entering a housing bubble, with some experts arguing that steady rising real estate prices may come crashing down in the coming year as interest rates rise, further pinching the wallets of Swedish homeowners – many of whom have flexible rate mortgages.

Pär Magnusson, head analyst for the Nordics at the Royal Bank of Scotland, is among those concerned about a Swedish housing bubble.

However, he rejected Hamilton’s proposal of reducing the mortgage interest tax deduction.

“It won’t really have much effect. It feels like playing to the gallery,” he told the TT news agency.

Magnusson estimates that, at current interest rate levels, the reduction would be equivalent to a rate increase of 0.25 percent.

He believes a more effective instrument for dealing with a housing bubble would be a requirement that Swedes pay down the principle of their mortgages.

“That would give you a real effect, which addresses what the exact risk is,” he said.

An amortisation payment requirement on the amount of a mortgage that exceeds 70 to 75 percent of a home’s value would be appropriate, according to Magnusson.

He was also critical of moves by the Riksbank to combat rising house prices by adjusting the repo rate, Sweden’s benchmark interest rate.

Magnusson described monetary policy as too blunt a tool which comes down unnecessarily hard on the entire economy.

Roger Mörtvik, the head of social policy at the Swedish Confederation for Professional Employees (TCO), a white-collar union, also cast doubt on Hamilton’s proposal.

“It’s starting at the wrong end,” he told the TT news agency.

An important first step, he argues, is establishing whether or not there is a housing bubble and if so, carefully analyzing how to deal with it.

Mörtvik also warned for unintended consequences of a reduction in the mortgage interest tax break.

If the reduction isn’t compensated with a lower income tax, for example, the desired effect of controlling housing prices would disappear.

“And if prices aren’t brought under control and it just gets more expensive to borrow, that would make it harder for young people to enter the housing market,” argued Mörtvik.