It’s fascinating to watch what’s playing out in Sweden having experienced the tag team of Mark Carney and the late Jim Flaherty when it comes to frothy housing markets.

Mr. Carney, when he was Bank of Canada governor, and Mr. Flaherty, as finance minister at the time, took a double-barrel approach to cooling down hot markets.

The former, who now heads up the Bank of England, threatened several times to raise interest rates unless Canadians curbed their big appetite for mortgage and other debts.

The latter acted several times by clamping down on the rules, and the current finance minister, Bill Morneau, has similarly taken action.

Not so in Sweden, where property values and household debt is also a big issue.

Sweden’s central bank today cut its key rate further into negative territory, admitting that low rates are fuelling both home prices and debt, which is obvious.

Not so obvious is the response of the Riksbank, which warned its government in no uncertain terms that it should act.

“If negative surprises were to occur or if rates were to increase in a way that households were not expecting, heavily indebted households may choose to rapidly increase their saving and hence reduce their consumption,” the central bank said in its monetary policy report.

“In such a scenario, an economic slowdown could be heavily exacerbated, particularly if housing prices also start of fall.”

Home prices in Sweden are rising at a double-digit pace, and the key measure of household debt to disposable income is forecast to top out at more than 190 per cent in a couple of years.

“Fundamental reforms to the housing market are needed to create a better balance between supply and demand and thereby reduce the risks associated with household indebtedness,” the Riksbank said.

“However, reforms that make households less willing to take on debt are also important, such as a gradual reduction in the tax relief on interest payments. The responsibility for such reforms lies with the Riksdag and the government.”

Not only that. It warned that it’s of the “utmost importance” that the government and the Riksdag, Sweden’s legislature, clarify the mandate of the Finansinspektionen, the financial regulator.

More measures are needed beyond those taken already, it said.