* Cbanker af Jochnick says more action on household debt needed
* Macro prudential policies alone can not solve Sweden's problems
* Says time to review mortgage tax breaks (Adds quotes, background)
By Johan Ahlander
STOCKHOLM, Jan 31 (Reuters) - Sweden needs to take further measures to reduce the threat of high levels of household debt to the economy, the central bank's first deputy governor, Kerstin af Jochnick, said on Friday.
She added that regulatory supervision alone would not do the job and called for more action, including a review of tax incentives.
The majority of rate-setters on the Riksbank's board have been concerned for some time about levels of household debt in Sweden that, at around 170 percent of disposable income, are among the highest in Europe.
"Action is needed now to reduce the risks of household indebtedness," af Jochnick said in the text of a speech. "In the long term it is not sustainable that debt continues to increase at the same rate as today."
Total lending to Swedish households rose 4.9 percent in December from the same month a year ago, and has been growing much faster than wages.
In December, the Riksbank cut its key repo rate due to low inflation, setting aside concerns among the majority of rate-setters about household debt levels.
Af Jochnick said developments in the economy since then have been roughly in line with the Riksbank's expectations.
But she said the central bank remained concerned about household debts as international confidence in the Swedish housing and mortgage markets underpins the country's banks' access to financing.
This makes the economy vulnerable to a sudden fall in housing prices, which could deepen and extend any future downturn.
Sweden's Financial Supervisory Authority has been put in charge of ensuring financial stability and has introduced a cap on mortgage borrowing of 85 percent of a house's purchase price. It also plans to increase further the amount banks need to set aside to cover the risks from mortgage lending.
Sweden has also adopted tougher bank capitalisation targets than many other European countries and the government is considering further moves.
But af Jochnick said macro prudential supervision alone cannot solve Sweden's problems with household indebtedness.
"I think macro prudential (supervision) currently can only alleviate the problems by increasing banks' resilience to risks and hopefully dampen debt to some degree," she said.
The Riksbank held interest rates at 1.00 percent through much of 2013 over worries about stoking credit growth and a possible housing bubble.
House prices in Sweden have nearly tripled in the last 15 years. An average family property cost around 4 million Swedish crowns ($623,000) in Stockholm and its suburbs in the third quarter of 2013, on par with London.
The second most senior rate-setter after Governor Stefan Ingves, af Jochnick said Sweden should consider a range of measures to balance the housing market, including reviewing tax incentives, though this was outside the Riksbank's mandate.
Sweden offers generous tax breaks on mortgage interest payments.
Af Jochnick also noted the need for structural changes to Sweden's housing markets. For decades the creation of new homes has lagged Sweden's population growth, crimping labour mobility, raising the cost of housing, especially in urban areas. (Editing by Simon Johnson/Jeremy Gaunt)