Det norske boligmarkedet – på vei mot en boble?

1. Det norske boligmarkedet – på vei mot en boble? Steinar Juel, chief economist 26. november 2009

2. 14% Norway: Home ownership is most common • An unprofessional rent market • No regulations on rents • Housing co-operatives mainly in larger cities • No regulations on sales prices

3. The tax system favours home ownership • Interest expenditure deductible from taxable income. No upper limits • No tax on capital gains when selling a house/apartment the owner has lived in one of the last two years • No state housing tax. About 50% of the municipalities have local housing tax (Maximum 0.7% of 75% of estimated market value) • Low valuation of houses when wealth tax is levied (about 20% of market value)

4. A majority of detached houses, but strong growth in multi-apartment buildings • Demographic reasons • And on average, 20-25 % of households also have a cabin/second home • Number of cabins grown by 12 % the last 8 years

5. Banks are the main providers of home mortgages • Mortgage institutions (bank owned) have grown in importance recently • Market for covered bonds • 93 % of households’ debt is at floating rate (Fixed for less than 12 months) • A small share in foreign currencies

6. House price development important for the economy • Contributed significantly to economic growth up to 2007 • Construction and consumption • IMF (advanced economies): Effects after a year of 10% decline in house prices: • GDP down 2% • Private consumption down 2 1/2 % • Residential construction down 15%

7. Not financial crisis in NorwayLessons from the 1988-93 banking crisis still remembered • Acute liquidity crisis autumn 2008, which was handled • Banks had no investments in subprime bonds or other toxic assets • Limited investments in other negotiable papers • Limited loan losses, higher pre loss earnings Source: Kredittilsynet

8. Source: Kredittilsynet Banks continued to function well, but became more careful after Lehman Brothers • Smaller share of new mortgages with Loan-to-value (LTV) above 80 % of prudent valuation • Reduced willingness to finance a new home before the existing was sold • It is normal that banks are more careful during downturns

9. Growth in lending have declined, but mainly because of reduced demand • Not credit crunch • Reduced investments, normal in downturns • Growth in lending to households has levelled out about 6 ½ %

10. Mild effects on the Norwegian economy

11. Unemployment increased less than expected • ..and came from an unsustainable low level • Employers have been hoarding labour • Unemployment will probably increase somewhat more, but still be at a low level

12. But strong policy measures

13. High debt and floating mortgage rates; rate cuts have strong effects • Among the highest debt/income rates in the world (Higher in Denmark) • Make households more vulnerable, especially when most of the debt has floating rates • Norges Bank would like the ratio to go somewhat down

14. The crisis halted a gradual decline in house prices • House prices went up again when the interest rate was slashed • Pre crisis, interest rate was increased to cool down the economy • A controlled decline in house prices was welcomed

15. Innovations in the mortgage market contributed to house price increases • Mortgage credit line introduced in 2005 • Popularity exploded • Not repayment plan, similar to an overdraft facility • Renewed typically every 10 years • Similar products in other countries: • Interest only loans in Denmark • Flexi loans in UK, Australia and New Zealand

16. Loan periods for various LTV ratios Source: Kredittilsynet The repayment periods have increased • 25-30 years is now quite common • Quite normal internationally • Early 1990s’, Above 20 years was seldom • Longer repayment periods that households are able to live with higher debt

17. Source: IMF weo Oct 2009 Source: IMF weo Oct 2009 Norway: Elevated house prices, but not bubble - yet

18. Conclusions • Not financial crisis and mild downturn in Norway • Lessons from the 1988-93 banking crisis are still remembered • Norges Bank’s rate cuts in response to the international crisis have postponed an adjustment in households’ debt and in house prices • Elevated house prices and household debt, but no bubble • Changes in the structure of housing finance encouraged by measures taken to remedy liquidity crisis • Lesson from the 1988-93 banking crisis; Losses on home mortgages did not kill the banks, but the repercussions on the business sector, including on commercial real estate

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