Det norske boligmarkedet på vei mot en

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

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 14% 2

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) 3

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 4

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 5

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% 6

Not financial crisis in Norway Lessons 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 Source: Kredittilsynet 7 • Limited loan losses, higher pre loss earnings

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

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 % 9

Mild effects on the Norwegian economy 10

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 11

But strong policy measures 12

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 13

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 14

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 15

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

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

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 18

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