Top Central Banker in Norway Prefers Housing Slump to Gains
Norway’s central bank is comfortable with house price deflation and will avoid policies that drive up the property market of Scandinavia’s richest economy, Governor Oeystein Olsen said.
The economy can withstand house price declines “over a longer period,” Olsen said yesterday in an interview at his office in Oslo. “We’ll be concerned if housing prices and debt levels continue to grow. It doesn’t have to be a concern with a moderate downward reaction in housing prices.
The housing market is showing signs it may be retreating from a half decade of increases during which record-low interest rates drove real estate prices to all-time highs. The central bank this month kept its main rate unchanged for a 10th meeting and predicted tightening will start in the ‘‘summer” as the economy picks up.
Though Norway’s government has no net debt, thanks to its $810 billion sovereign-wealth fund, consumer borrowing has ballooned to a record 200 percent of disposable income.
Norway’s two-year note yield rose four basis points today to 1.72 percent. The krone rose as much as 0.5 percent against the euro to 8.069, the strongest level since Sept. 27. It was the biggest gainer against the dollar and the euro of 16 major currencies tracked by Bloomberg after the South African rand.
In an effort to cool the development, Norway has introduced a number of measures, including capping loans at 85 percent of a property’s value, raising bank capital requirements and increasing the risk weights that lenders assign to their assets.
House price growth slowed to 2.6 percent in September, the smallest increase since June 2009, according to a monthly report by real estate brokers. A central bank survey released this month showed banks saw less credit demand from households in the third quarter with demand even seen dropping this quarter.
Olsen signaled the bank is ready to tolerate sustained house price declines in response to Norway’s financial imbalances. The public should be “prepared” for a “downward reaction” in house prices, he said.
“It’s important to realize, especially for households, there could be a reaction downwards in prices over a longer period without the economy entering into a recession,” Olsen said. “Even a drop on a yearly basis on house prices doesn’t have to spur any chain of negative impulses throughout the Norwegian economy.”
Policy makers have sought to calibrate policy to avoid fueling krone gains while at the same time preventing a build-up in debt and a potential housing bubble. As the euro area struggled through its debt crisis, western Europe’s largest oil exporter emerged as an investor haven. While that helped keep unemployment below 4 percent, it also fueled the risk of overheating.
Olsen said he’s for now “satisfied” with the measures put in place, which also will include counter-cyclical buffers for banks.
“I have, on a couple of occasions, warned on having too high ambitions in what you could achieve, whether you could avoid financial crisis in this area, and that has to do with difficult to define, impossible to measure, enormous complexity,” he said. “I will not exclude that you could have new measures, but I’m not able to point at any specific measure that’s lacking.”
The central bank’s two most recent rate cuts -- in March last year and in December the previous year -- were in part driven by monetary policy abroad and by a need to prevent a krone appreciation that was threatening exporters.
Olsen as recently as June signaled the bank could cut rates again. The krone has weakened almost 6 percent since then. He said yesterday the krone was the “main argument” for cutting rates in March 2012, and was also “one of several factors” for the rate cut signals in June.
“We did that specifically in my time as governor in March 2012,” Olsen said. It was “a main argument influencing the decision on the interest rate. That was in a situation where the krone was strong and tended to be even stronger with the danger of pushing inflation, which was low on the outset, even lower.”
He said the krone will probably play a part in future policy.
“The krone has been volatile for some time, it was a trend upwards, but if you compare our volatility with some others -- Australia, New Zealand, raw material producers other than Norway -- I think you can see much stronger fluctuations than we have had,” Olsen said. “There will be fluctuations in the krone going forward, I’m quite sure.”
At the bank’s latest meeting, the deposit rate was kept at 1.5 percent, after the krone sank and the housing market cooled. Underlying inflation, which adjusts for the effect of taxes and energy, reached the bank’s 2.5 percent target in August for the first time in four years, though price growth slowed to 1.7 percent last month.
Growth in Norway’s $500 billion economy is slowing as record household debt burdens curb demand and after persistent krone appreciation last year hurt exports. Mainland gross domestic product, which excludes oil and gas production, will expand 1.75 percent this year, the bank forecast in September. In 2012, GDP by that measure grew by 3.4 percent.
Olsen, who didn’t provide an official forecast with his October rate decision, said indicators since the bank’s September report “broadly” confirm the same economic picture.
“If you take a perspective over some years ahead, our forecast now is that growth will remain in the range of 2 percent to 2.75 percent and unemployment will remain low,” he said. “As we see it now, there will be no dramatic shift in the pace of growth and the overall economic situation.”
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