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STOCKHOLM (Reuters) - House buyers in Sweden have never had it so good, at least by some measures. But cheap credit and spiraling prices may be creating a bubble - one that could send the country's economy reeling when it bursts.
Sweden now has one of the fastest growth rates of any developed economy. Inflation is near zero and official interest rates are below zero. Home buyers can take advantage of interest-only loans and a variety of tax breaks.
On the other hand, consumer debt is about 175 percent of disposable income, one of the highest rates in Europe. Housing prices keep rising - apartments in Stockholm cost around $6,350 per square meter, on a par with London's $6,750. Most Swedes would take a century to repay mortgages at current rates.
"The prices are just crazy," said 37-year-old Cathrin Wentzel.
She was looking at a one-bedroom, 44-square-meter flat built in the 1930s in the chic Kungsholmen area of Stockholm. It featured a fireplace and balcony and had a view of the water. Asking price: 3.8 million crowns ($446,000). Wentzel reckoned she would need to offer at least 500,000 crowns more than that.
"I won an auction last week, but even though I offered 900,000 crowns more than the starting price, the seller withdrew the apartment," said Wentzel, who runs her own marketing company. "They did not think the bid was enough."
The Riksbank's decision this week to keep rates lower for longer just extends a bonanza of cheap money that has fueled the real estate prices and borrowing. But the central bank is caught in a dilemma.
Leaving rates so low only encourages home buyers. But raising them enough to tamp down the housing frenzy would also slow an inflation rate that is already flirting with zero and has dipped into outright deflation.
The concern is that Sweden might end up with a local version of the 2008 financial crisis. Homeowners saddled with enormous mortgages might see the value of the homes plummet. They would cut back on spending, try to save more - and hobble the economy.
In the last few months, concerns about a bubble have reached a fever pitch as house prices shot up still further. A government failure to clamp down on lending criteria has fed a 20 percent annual rise in the cost of apartments.
Most bidding in Sweden for flats and houses is done by text messages. Potential buyers scurry off from office meetings or dinner parties to punch in their latest offer - often upping their bids by $10,000 to $20,000 a text. Mortgage borrowing grew at its fastest pace in more than 4 years in September
Even so, the Riksbank has slashed rates to record low -0.35 percent to rekindle inflation and may go even lower.
"We have scored an own goal of sorts in not dealing with the housing market properly in Sweden, and in the long term that threatens the economic development," Riksbank Governor Stefan Ingves said.
Flush with borrowed money, buyers often snap up properties before public viewings, sometimes based only on photographs.
Some talk of being "addicted" to Hemnet, Sweden's most popular online real estate site. They pore over adverts many times a day hoping to find the perfect home.
John Hassler, chairman of the Fiscal Policy Council, a government advisory body, used not to be worried about the housing market. Now he is.
"Accelerating, inexplicable price increases in combination with speculation in the market is a bad sign," he said. "That is what makes me worried, which I wasn't a few years ago."
Not everyone sees a bubble forming. Skeptics say the market has been distorted by lack of building in past decades rather than too-easy credit.
Stockholm authorities estimate 16,000 homes must be built per year for the next decade to catch up with population growth. Half a million people are expected to move to the region by 2030 - not counting record numbers of asylum seekers.
At the same time, rising incomes and falling unemployment mean Swedes feel richer than ever.
"Even though apartment prices have gone up by 15 to 20 percent the last year, people can still afford it," real estate agent Tommy Langsten said.
A heavily regulated market means a decades-long wait to get a rental flat in Stockholm, making buying the only option.
Reforms to reduce the risk of a bubble have been uneven. Until 2010, Swedes could borrow 100 percent of property purchase prices and some borrowed more to fund renovation. A new 85 percent limit is often bypassed by unsecured loans.
Four of 10 Swedes still do not pay off their loans at all, encouraged by tax breaks. The center-right, in power from 2006 to 2014, sold off public housing and abolished real estate taxes, helping to push up prices.
The Riksbank and retail banks have called for a reduction in mortgage tax breaks and other steps. But even small measures - such as a government proposal to tightening mortgage rules for new borrowers - has run into legal difficulties.
Buyers are ignoring talk of a bubble to grab a dream home before the window of opportunity closes.
"I talked with a real estate agent about that and he said it was just talk," Wentzel said.
Reporting by Simon Johnson and Johan Sennero; Editing by Alistair Scrutton, Niklas Pollard and Larry King