Norway’s financial regulator recommended lowering a cap on how much consumers can borrow for home purchases as it seeks to prevent household credit growth from fanning a property market bubble.
The loan-to-value ratio on home loans should be capped at 85 percent, down from a recommendation of 90 percent, the Oslo-based Financial Supervisory Authority said today in a statement. The agency also said it sent a proposal to the Finance Ministry to give it legal authority to enforce lending standards.
“The vigorous growth in house prices and household debt heightens the risk of financial instability,” Morten Baltzersen, the FSA’s director general, said in a statement. A survey for 2011 “shows that the proportion of residential mortgages with a high loan-to-value ratio is on the increase, and a round of inspections of mortgage lending practice at a selection of banks shows that credit assessments need to improve.”
The regulator is seeking to tighten a market where home prices gained an annual 9.4 percent in August, according to data from Norway’s Real Estate Brokers Association. Household borrowing rose an annual 7.1 percent in July, near 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.
Lenders should also make allowance for a rate increase of 5 percentage points when assessing a borrower’s debt-servicing ability, the agency said, among other changes that also limit the use of non-amortizing loans. The agency will seek comment from consumer and financial organization before setting the final guidelines, according to today’s report.
“Stricter guidelines for mortgage loans will first and foremost hurt young, first-time buyers that don’t have help from the parents, and only have a limited effect in reducing pressure in the housing market,” said Arne Hyttnes, head of Finance Norway, a banking trade group, in a statement. Expansionary monetary and fiscal policy, tax incentives and limited housing development are the main drivers for housing prices, he said.
The regulator’s previous 90 percent guideline was introduced last year in an effort to cool the market. In Neighboring Sweden, similar measures haven’t prevented home prices from rising and property values there have gained 7 percent since October, when an 85 percent cap was introduced.
The FSA said today that a survey showed that 26 percent of mortgages had a loan-to-value ratio of more than 90 percent this year. In 2010, 21 percent of the loans had an LTV above 90 percent.
Europe’s lowest unemployment rate, at 2.7 percent, and estimated wage growth of more than 4 percent this year have fueled demand for credit in Norway and pushed property prices above pre-crisis records. The housing market faces added price pressure after a deepening European debt crisis and a weaker global growth outlook forced Norway’s central bank last week to signal unchanged rates this year.
“The housing market and credit is one of the most important variables and markets that we follow when we set interest rates,” said Central Bank Deputy Governor Jan F. Qvigstad in an interview last week, adding that the bank “shares” the FSA’s concern on housing risks.
Policy makers held the overnight deposit rate at 2.25 percent this month amid slowing global growth and as their counterparts in Washington, Frankfurt and Stockholm also remain on hold. The Oslo-based bank has signaled it doesn’t want rates to stray too far from borrowing costs elsewhere as it seeks to prevent krone gains.