(Bloomberg) -- The International Monetary Fund said Sweden might have to require banks to hold more capital and increase funding for the financial regulator, as risks rise in the country’s property sector.

Swedish housing as well as commercial real estate has come into focus as the prices of homes have plunged in the last nine months, and property companies are facing a funding squeeze as large bond volumes approach maturity. The financial watchdog’s stress tests have shown little risk that credit losses would surge even in a prolonged housing slump, while there are more concerns regarding commercial property.

“The risk to the commercial real estate sector stands out,” Tommaso Mancini Griffol, a division chief with the fund, told a news conference in Stockholm on Friday after an official staff visit. “The sector is large, it relies to a large extent on market funding, it is highly concentrated, and we suggest that the authorities consider higher capital requirements on banks for commercial real estate exposures.”

Read More: What’s Causing the Swedish Housing Market Plunge: QuickTake

The funding squeeze in Sweden’s real estate market has evoked memories of an early 1990s crash that brought the economy and its banks to their knees and broke the krona. Now, large volumes of bonds issued by property owners coming due in the next few years has raised concerns of fire sales and a negative spiral that in a worst case scenario could threaten financial stability.

Even as Swedish banks have strong capital and liquidity positions that would help cushion severe macroeconomic shocks, the country needs to be vigilant about risks to financial stability, the fund said in a statement.

The development in Swedish housing, which is emblematic of a broader international trend, started last year as inflation began to accelerate and the country’s central bank, the Riksbank, responded by increasing borrowing costs. Forecasters expect housing prices to dive by 20% from their peak, as the Riksbank is set to raise rates further.  

While the central bank has flagged a 25-basis point interest-rate hike at its February meeting, most economists believe it will have to do more after December inflation rose to a three-decade high.

The IMF advised the Riksbank to be better safe than sorry when charting the path for monetary policy.  

“The potential costs of entrenched inflation due to undertightening outweigh those of over-tightening,” it said. “The Riksbank should therefore continue to closely monitor developments and consider to slightly tighten the announced interest-rate path in order to increase the probability of comfortably achieving its desired inflation path.”

(Updates with quote from fourth paragraph, details.)

©2023 Bloomberg L.P.