In Norway, where property prices have doubled in about 10 years sending household debt to a record, the country’s financial regulator and central bank governor have warned of an overheated property market. The top candidate to become prime minister in elections next month says otherwise.
Erna Solberg, who most polls show will oust Prime Minister Jens Stoltenberg in Sept. 9 elections, says western Europe’s biggest oil producer needs to remove lending limits for its mortgage industry to further support the housing market.
Regulators “should be more focused on bankers’ ability in knowing who can repay their loans,” the 52-year-old Conservative Party leader said in an interview in Oslo last week. “We’re not the U.S.; in Norway, people don’t get away from paying their loans -- we don’t have that type of dysfunctional system.”
The debate over whether Norway’s housing market is in the grip of a bubble is now splitting the nation as a rally in home prices has ebbed. While Solberg rejects any signs of a bubble, Morten Baltzersen, who heads the Financial Supervisory Authority, has backed measures designed to curb mortgage lending. Central bank Governor Oeystein Olsen has warned on housing imbalances, even as low rates abroad have forced him to keep interest rates near a record low to avoid spurring gains in the krone.
In Norway, where unemployment slipped to 3.4 percent in May and public finances are backed by a $740 billion sovereign wealth fund, household debt has surged to about 200 percent of disposable income, according to the central bank. The average home price in Oslo has more than doubled since 2000 to about 4.55 million kroner ($770,000), according to Norwegian Real Estate Agents Association.
Norwegians can’t escape their mortgage obligations by declaring bankruptcy, which can act as a ceiling on how much debt people amass. In the U.S., it is sometimes possible to escape mortgage debt through bankruptcy, though ordinarily you can’t if you keep the home.
The world’s richest economies, such as Norway, Switzerland and Canada, have tried to gauge the extent to which unprecedented monetary easing in the U.S. and Europe is fueling asset bubbles. Robert Shiller, the co-creator of the S&P/Case-Shiller home-price index, said at the beginning of last year that Norway was already in a housing bubble.
In response to the concerns, Norway’s financial regulator has set a guideline urging banks to cap mortgages at 85 percent of a property’s value, where before many borrowers were getting loans of 100 percent. The Finance Ministry has proposed tripling risk weights on mortgage assets and also wants to limit issuance of covered bonds backed by home loans.
A rally in Norway’s covered bond market also has come to a halt as fissures start to show in the housing market.
The Iboxx Norwegian covered bond total return index has risen 1 percent over the past 12 months, compared with an annualized 5.7 percent gain since mid-2008.
As Norway’s election campaign heats up, concerns over housing prices are giving way to promises to pad voters’ wallets. Stoltenberg, who has served two four-year terms, is promising to extend the nation’s welfare services while Solberg wants to cut taxes. She also argues that instead of worrying about regulating mortgages, Norway needs to make sure citizens can get the credit they need to buy homes.
“A lot of young people who are finishing university and getting well-paid jobs still have a problem getting a bank loan for a house,” she said. “We think that’s too strict.”
Her main ally in trying to unseat the premier, Progress Party leader Siv Jensen, agrees.
“The banks say that when they evaluate whether or not to give a loan, they will see it in a long-term perspective,” she said in an Aug. 5 interview. “The new rules make it harder for the banks to have that flexibility. We need to change that back to what it was.”
As life in Norway grows more expensive, wages are rising, reducing competitiveness. Manufacturing labor costs in the $480 billion economy are almost 70 percent higher than the average in the European Union. Norway, like Switzerland, has opted to remain outside the 28-nation EU.
While central bank rates have stayed on hold since March 2011, banks including DNB ASA have raised mortgage rates this year, increasing revenue and helping cool the housing market. House prices slid a seasonally adjusted 1.2 percent in July, trimming the annual increase to 3.9 percent from 8.5 percent at the start of the year, according to data from the Norwegian Real Estate Agents Association.
Norway, like Sweden, plans to impose core capital requirements on banks that exceed those set by European and international regulators. It is targeting core capital requirements for its banks of 10 percent of risk-weighted assets by July next year, up from 9 percent. For systemically important banks, the target will rise to 11 percent in 2015 and 12 percent in 2016. The country is also preparing to roll out a counter-cyclical buffer of as much as 2.5 percentage points, to be imposed according to central bank guidance.
Banks in neighboring Sweden must hold at least 10 percent core Tier 1 capital of risk-weighted assets this year, with the minimum requirement rising to 12 percent in 2015.
The regulator said in April that strong credit growth was mostly demand driven, and warned that optimism gripping Norway can easily evaporate. Solberg said the government has gone too far in clamping down on banks.
“The capital regulations should go in the same tempo as the Scandinavian countries,” Solberg said. “Even if the aim has been to tighten capital requirements for housing, housing is the safest area of lending in the Norwegian economy, when the bank capitals get tighter, they will start cutting back on small businesses instead of cutting back on housing.”
Solberg is leading in most opinion polls as Stoltenberg’s Labor-led coalition loses support. She had her best poll result last month with 41 percent of Norwegians saying they want her to lead the nation. Stoltenberg’s support was 29.2 percent in the same poll.
He’s likely to be voted out because people want a change, rather than Norwegians being unhappy with his policies, said Johannes Bergh, an election researcher at the Institute for Social Research in Oslo, said last month
Solberg argues measures affecting credit markets are misguided because the main cause of imbalance in Norway’s housing market is a lack of supply.
“Our biggest problem now is that in the four largest cities of Norway, population growth is outpacing the building of houses, and that leads to an increase in house prices,” she said.