‘Out of Sync’ Housing Market in Norway Prompts FSA Warning

Norway’s regulator will need to set stricter standards than those enforced elsewhere as record house prices and private debt levels grow more out of step with developments in other nations, its top official signaled.

“Our starting point is a concern for overheated Norwegian household borrowing and house price development,” Morten Baltzersen, the Financial Supervisory Authority director general, said in a Jan. 31 interview in Oslo. “As our cycle is out of sync with the rest of Europe, so is our starting point.”

The FSA was last year ordered by the Finance Ministry to review rules to curb covered bond issuance -- used in mortgage finance -- after it surged eight-fold since 2007. The government also told the regulator to consider almost tripling risk weights on mortgage loans to make banks think twice before selling more home loans.

Near record-low interest rates in the world’s fourth-richest nation per capita, falling unemployment and wage growth have pushed private debt levels to an all-time high in Norway. Western Europe’s largest petroleum exporter has withstood the euro area’s debt crisis thanks to its oil wealth, helping real home prices surge almost 30 percent since 2008. Property values, adjusted for inflation, have almost doubled in the past decade.

“Even if a major housing collapse is not yet inevitable we believe that it should be a matter of great urgency for the Norwegian authorities to seek to cool their housing market soon, to reduce risks that the housing market becomes even more overextended,” said Tina Mortensen, a London-based analyst at Citigroup Inc., said today in a note to clients.

Covered Bonds

The ministry asked the regulator in December to assess a “qualitative” rule on loan transfers by banks to mortgage units, according to letters released that month. The request to craft new rules came after the watchdog earlier last year said that the use of mortgages as bond collateral means fewer high-quality assets are left on balance sheets, while the low funding costs of covered bonds risk drawing financing from other areas.

Norway’s covered bond market has grown to about 800 billion kroner ($146 billion) from less than 100 billion kroner in 2007 and makes up about 20 percent of bank funding, FSA data shows.

The agency is preparing a reply to the ministry by March 1. While Baltzersen declined to comment on specific deliberations, he said the risks are clear.

Funding Dangers

“You could easily end up in a situation where, after a turn in the housing market, it would be difficult to raise further covered bonds and at the same time the best quality assets of the parent banks are tied up in mortgage companies,” he said. “That could also lead to problems in other market funding, such as senior borrowing in the parent bank.”

House prices rose an annual 8.5 percent in January, while private debt levels will grow to more than 200 percent of disposable incomes in 2013, according to central bank estimates.

The government in December proposed tripling risk weights on home loans, requiring banks to set aside more capital to protect them against mortgage losses. At 35 percent Norway’s risk-weight requirement will be stricter than in neighboring Sweden, where the regulator has set a 15 percent minimum.

“There is reason to believe that higher risk weights, all other things equal, would enhance banks’ resilience and reduce the propensity to expand household lending,” Baltzersen said. “The higher the risk weights the more capital is tied to this lending activity and the more expensive it becomes.”

Industry Good

The ministry wants the FSA to investigate whether banks should reduce their accounting ties to their mortgage lending units. It also told the regulator and the central bank to look into whether credit units that issue covered bonds should have restricted bank concessions limiting them to mortgage lending.

The proposed regulatory changes prompted JPMorgan Cazenove and Nordea Bank AB to cut their ratings on Norway’s biggest lender DNB ASA to neutral and sell respectively.

“What’s good for the banking industry in the long-run is not necessarily rewarded in the equity market in the short term,” Baltzersen said. “Over time it is an advantage for a bank to be solid.”

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