* OECD says concerned a housing price bubble may develop
* SNB should take measures to curb mortgage lending
* Swiss should limit tax deductibility of interest expenses
ZURICH, Jan 24 (Reuters) - To avoid a housing bubble Switzerland should take steps to curb excessive mortgage lending, including phasing out tax allowances on interest expenses, the Organisation for Economic Co-operation and Development said on Tuesday.
Mortgage lending in Switzerland has expanded rapidly in recent years as ultra-low interest rates since March 2009 have encouraged borrowing.
The OECD, in its latest economic survey of Switzerland, said the Swiss National Bank (SNB) was right to maintain an expansionary monetary policy as inflation is expected to remain close to zero until 2013. But it should look to rein in credit, it said.
"Since interest rates may therefore remain unusually low and liquidity abundant it is important that macroprudential measures are taken in parallel to avoid excessive mortgage lending," the survey said.
The SNB warned last June there were signs of overheating in the property markets in Zurich and Geneva and has said it is keeping a close eye on the housing and mortgage markets. It has also warned that low interest rates might tempt banks to loosen their lending standards.
The UBS index of Swiss residential real estate rose in the third-quarter of 2011, according to the latest data, but remained in the boom phase and not in a bubble.
The OECD said high levels of household debt also risked destabilising the Swiss financial system and the country should look to phase out a provision that allows households to deduct interest expenses from their taxable personable income.
"By giving incentives to household indebtedness, the Swiss tax regime can potentially aggravate any future period of financial stability," the OECD said.
Mortgages comprised 18.7 percent of household liabilities in 2010, up from 17.8 percent in 2006, according to the latest SNB data.
The government wants banks to take measures to regulate the real estate market and is eyeing measures, including improving the SNB's access to bank information and countercyclical buffers for banks, to shield them from big mortgage writedowns.
Switzerland should also consider shifting the tax burden away from personal income towards consumption to boost growth, by raising the current standard 8 percent value-added tax (VAT) rate and considering applying it to financial services, the OECD said. (Reporting by Caroline Copley; Editing by Susan Fenton)