Norway Seeks Mortgage Cap Probe in Push to Support Lending

Norway’s new government asked the financial regulator to evaluate whether limits on mortgage lending are placing unnecessary constraints on the housing market.

The Finance Ministry told the Financial Supervisory Authority to review the effects on banks and homeowners of guidelines in place since 2011 that cap mortgages at 85 percent of a property’s value, according to a letter released on Oct. 26. The ministry wants an assessment of whether an outright rule would function better than a guideline in regulating the loan limit. Before the September election, the Conservative-led coalition had promised to ease mortgage standards.

“The guidelines have to be flexible enough to ensure that borrowers can count on getting a mortgage from the banks,” Finance Minister Siv Jensen said in the statement, setting an end of January deadline for the investigation. “We’ve asked for an evaluation to make sure the guidelines are flexible enough to take into account the homebuyers’ ability to repay debt.”

Prime Minister Erna Solberg ousted a Labor-led coalition last month after promising to raise an existing limit on mortgage lending to 90 percent of a property’s value. The new government has also proposed tax breaks to encourage households to save more and help Scandinavia’s richest economy tackle its record private debt load.

Overheated Market

The FSA has received the Finance Ministry’s letter and will reply by the deadline set, but has “no further comment at this time,” spokesman Jo Singstad said in an e-mail.

Though Norway’s government boasts no net debt, thanks to its $810 billion sovereign wealth fund, the nation’s consumers have borrowed an amount that has ballooned to twice their disposable incomes after years of low interest rates. Households have used the money to drive up property prices to a record high, prompting warnings from regulators and economists that the development is unsustainable.

Solberg’s plans to ease the mortgage cap triggered a warning from the FSA last month amid concern Norway’s housing market is overheated. The regulator, the central bank and the International Monetary Fund have all sounded the alarm on risks facing Norway’s housing market after prices doubled over the past decade and debt swelled.

Since the FSA introduced measures to curb bank lending, the housing market has shown signs of cooling. Home price growth slowed to 2.6 percent in September, the smallest increase since June 2009, according a monthly report by real estate brokers. A central bank survey released earlier this month showed banks saw less credit demand from households in the third quarter with demand seen dropping this quarter. That’s raised concern the slowdown could hurt the economy.

Economic Risks

Last week, Norges Bank left its benchmark interest rate unchanged for a 10th meeting, in part as a deflating housing market removes pressure from the bank to tighten policy. The bank signaled in September it will move toward higher rates as early as the “summer” of next year.

Growth in Norway’s $500 billion economy is showing signs of stalling as household debt burdens curb private 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.

In its letter to the FSA, the government also asked the regulator to assess what effect, in general, tighter mortgage rules have had on the economy.

Before it's here, it's on the Bloomberg Terminal.