Norway Poised to Relax Rules to Fight House Price Deflation

Norway is moving closer to easing mortgage lending standards as the nation’s deflating property market prompts concern among lawmakers that existing regulations are too tight.

Real estate prices, which have doubled over the past decade and touched a record high this year, are now dropping faster than the central bank had predicted. The Conservative-led government, which won power in September, says it’s now looking into raising the amount banks can lend to borrowers to 90 percent of a property’s value, from 85 percent previously, in an effort to support first-time buyers.

“Norwegian banks are already in a good position,” Hans Olav Syversen, the head of the parliamentary finance committee in Oslo and a member of the Christian Democrat party that the government relies on to rule, said in a Nov. 21 interview. “We’re asking for a more flexible rule. A 10 percent down-payment should be enough if banks take into account individuals and their own ability to pay their debts.”

Norway’s housing market, which Nobel laureate Robert Shiller already in 2012 said was in a bubble, has been inflated by a period of record-low interest rates that fueled a borrowing spree in Scandinavia’s richest nation and left Norwegians more indebted than ever before. Households now owe about twice their disposable incomes to their creditors, a level the central bank and the financial regulator have warned is unsustainable.

The krone slid 0.7 percent to 8.2748 per euro as of 5:13 p.m. in Oslo. The two-year yield fell two basis points to 1.50 percent.

Hard Landing

Yet recent real estate data show that house price gains have reached a tipping point. House prices slid a seasonally adjusted 1.5 percent in October from a month earlier, dropping for a second month, according to data from the Norwegian Real Estate Agents Association.

Nordea Bank AB, the largest Nordic Lender, forecast earlier this month that house prices will fall as much as 20 percent over the next two years, forcing the central bank to cut its main rate twice next year, from the current 1.5 percent.

“It’s a rather hard landing,” said Erik Bruce, senior economist at Nordea.

Yet economists are unsure what effect easing mortgage lending standards will have at this point in the cycle.

It “could damp the downward correction,” Bruce said. “But I’m not sure this is a wise thing to do, although the market can handle an easing of lending standards.”

Seeking Flexibility

Norway, like Sweden, has imposed core capital requirements on its banks that exceed those set by European and international regulators. Lenders in Scandinavia’s richest economy need to hold 10 percent capital of their risk-weighted assets by July next year, compared with 9 percent. The Basel Committee on Banking Supervision sets a 7 percent minimum, due to be enforced from 2019.

Finance Minister Siv Jensen has asked the Financial Supervisory Authority to evaluate the effects on banks and homeowners of guidelines in place since 2011 that limit mortgage lending to 85 percent of a home’s value.

“There’s an overall agreement that we need to have good regulations to take care of the housing market,” Jensen said in a Nov. 22 interview. “What I have done is sent a letter to the FSA to make this a little bit more flexible.”

Before the September election, the Conservative-led coalition had promised to ease mortgage standards. The new government, led by Prime Minister Erna Solberg, will also give households tax breaks to encourage them to save more and reduce indebtedness.

Cutting Forecast

Nordea isn’t the only bank predicting a steep house price decline in Norway. SEB AB forecasts a drop of as much as a 15 percent in home prices by 2015 from their peak. Analysts at DNB ASA, Norway’s biggest bank, are revising down their forecast for the housing market. The bank has so far estimated prices will decline 2.5 percent in each of the next two years.

While DNB still sees a “relatively soft landing,” easing lending requirements “would in isolation mean a stronger housing market,” said Kjersti Haugland, an analyst at the bank.