International Monetary Fund (IMF) has called for phasing out of preferential tax treatment to housing in the four Nordic countries, Denmark, Finland, Norway, and Sweden (Nordic-4) over the medium term.

In a report captioned ‘Nordic Regional Report' prepared by IMF staff, IMF notes: “All four countries provide generous tax preferences for housing , such as advantageous mortgage interest deductibility. Together with deferred amortization and low rates this will continue to encourage excessive household indebtedness, adding to the risk of a banking crisis should house prices correct or unemployment increase.”

As put by the Report that was released on 5th September, “Despite variation in the policy agenda between the Nordic countries, consideration should be given to phase out gradually preferential tax treatment of housing assets and restrict the availability of interest-only mortgages, and adjust mortgage risk weights to ensure adequate capital buffers for banks while encouraging sufficient liquidity in the system.”

According to the Report, authorities in Nordic countries are also aware of the potential risk stemming from the preferential tax treatment of housing. While limiting the deductibility of mortgage interest could have a dampening effect on household borrowing, alternative options for housing taxation could also be explored.

It says: “However, housing taxation remains a sensitive issue in the Nordic countries and changes should be evaluated in the context of the overall tax system and the stability of the housing market.”

Discussing the ‘Policy Agenda for the Nordic Region', the Report says: “Phasing out tax advantages for home ownership––including mortgage interest deductibility, common in all of the Nordic-4 ––would help temper household mortgage borrowing and reduce debt levels over the medium term without precipitating an injurious house price correction.”

IMF's Board of Executive Directors considered that sound national macroeconomic frameworks have provided valuable fiscal space, and welcomed the progress by all four governments in strengthening financial sector and macro prudential policies.

They highlighted the benefits of further reinforcing national policies on housing and banking to preempt systemic risks that could arise from house price corrections and banks' dependence on wholesale funding. In this regard, Directors supported ongoing efforts to raise risk weights for mortgages to ensure adequate capital buffers for banks while providing sufficient liquidity in the system.

The Directors stressed the importance of maintaining strong fiscal buffers to guard against costly tail events in the banking sector, restricting the availability of interest-only mortgages, and gradually phasing out preferential tax treatment of housing assets while considering alternatives in the context of broader tax reforms in individual countries.

The report notes that Nordic-4 are faced with a challenging mix of large, cross-border banks and highly indebted households at a time of weak global growth.