Norway House Bubble Risk May Lead to Tougher Rules, FSA Says

Norway’s financial regulator may force mortgage lenders to adopt stricter rules in an effort to prevent the biggest household debt burden in more than two-decades from fanning a property market bubble.

“The more indebted the households become and the higher the property prices go, the greater is the potential for a setback,” Morten Baltzersen, who took over as director general of the Oslo-based Financial Supervisory Authority last month, said in an interview. “I’m not in a situation where I can state there’s a bubble, but the longer these developments go on, the further it goes, the higher is the risk of a bubble.”

Norway’s $535 billion sovereign-wealth fund has so far shielded the country from the worst of Europe’s debt crisis. The world’s second-richest nation after Luxembourg boasts Europe’s lowest unemployment rate, at 2.7 percent, with estimated wage growth of more than 4 percent this year. That’s fueling demand for credit and pushing up property prices as the central bank keeps interest rates near record lows.

House prices jumped an annual 9.4 percent in August, accelerating from 8 percent growth last year, according to the country’s Real Estate Brokers Association. Household credit rose an annual 7.1 percent in July, hovering at a 2 1/2-year high, Statistics Norway said. The central bank estimates consumer debt burdens will grow to more than 204 percent of disposable income next year, the highest since at least 1988.

Rate Outlook

Demand for credit may keep rising as borrowing costs remain low. Policy makers will probably be forced to shelve interest rate increases until next year amid a deteriorating global recovery outlook, according to Bjoern-Roger Wilhelmsen, chief currency strategist at First Securities ASA and a former central bank economist.

“Interest rates abroad have fallen significantly, limiting the room for maneuver by Norges Bank,” he said in a note today. The central bank announces its next rate decision on Sept. 21. All 21 economists surveyed by Bloomberg estimate the bank will leave its benchmark deposit rate at 2.25 percent.

The krone, which has gained 2.3 percent against the euro over the past three months, slipped 0.4 percent to trade at 7.7217 by 9:56 a.m. in Oslo. The currency was 1.3 percent weaker against the dollar, trading at 5.6433.

The financial regulator last year introduced a guideline seeking a 90 percent cap on loans relative to property values in an effort to cool the market. In neighboring Sweden, similar measures haven’t prevented home prices from rising. Property values there have gained 7 percent since October, when an 85 percent cap was introduced.

Lending Standards

The FSA is considering whether existing measures in Norway are adequate or “whether they should be stricter,” Baltzensen said in the Sept. 16 interview. “The loan-to-value ratio is a central parameter. It exemplifies one of the features of such guidelines that we will assess,” he said, adding that new standards may become binding.

Finance Minister Sigbjoern Johnsen this month met with the nation’s top bank executives to explore the need for stricter lending rules. It is “important that we have a very keen eye on this because the debt ratio for households is very high,” he said in a Sept. 5 interview.

Norway in the early 1990s seized control of its biggest banks, in part because of a real estate slump that followed a surge in lending growth triggered by deregulation in the 1980s.

Bubble Disbeliever

The country’s biggest lender, DnB NOR ASA, doesn’t share the government’s concerns that a prolonged period of near-record low borrowing costs risks fueling an overheated property market.

“We don’t believe that there’s a bubble,” said Leif Teksum, head of large corporates and international operations at the Oslo-based lender, in a Sept. 14 interview. “At some stage interest rates will come up and mortgage rates will come up, but I think there still is a buffer because of the salary increases that we experience.”

Regulators, including Johnsen, have also suggested a joint Nordic effort to put a floor on so-called risk weightings assigned to mortgage assets, a move that could force banks to raise their capital buffers. The risk weightings are about 6 percent to 11 percent in the Nordic countries, compared with 13 percent to 20 percent in other European countries, according to Norway’s central bank.

‘Detrimental Effect’

DnB NOR’s Teksum said tougher regulation may be ineffective in curbing house prices amid salary growth of 4 percent to 5 percent. “Maybe that’s good for the market but I don’t think that will have a detrimental effect on house prices.”

If stricter rules are imposed, these should allow for “flexibility” and shouldn’t “just look at loan to value ratios but maybe we should be looking at other criteria,” he said.

Norway’s statistics office on Sept. 8 estimated wages will rise 4.1 percent this year.

The housing market faces added price pressure after a deepening European debt crisis forced Norway’s central bank to abandon a planned rate increase last month, leaving its deposit rate at 2.25 percent. The bank has signaled it doesn’t want rates to stray too far from borrowing costs in the U.S. and Europe in an effort to prevent krone gains. The U.S. Federal Reserve pledged last month to keep its target lending rate at close to zero until at least mid-2013, while the European Central Bank left rates unchanged and resumed bond purchases to support the region’s debt markets.

“There is a reason for concern that the sheltered sectors of the economy shall be fueled by low interest rates,” said Baltzersen. At the same time, “low international interest rates influence the room for maneuver in Norwegian monetary policy,” he said.

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