Bloomberg News

Norway Faces Severe Credit Shock on Household Debt, FSA Says

February 21, 2012

(Updates with economist comment in eighth paragraph.)

Feb. 13 (Bloomberg) -- Norway faces “severe” imbalances in its credit and property markets as households continue to amass debt at unsustainable levels, according to the head of the country’s financial regulator.

“Growth rates on household debt and house prices are not following a sustainable path,” Morten Baltzersen, Director General of the Financial Supervisory Authority in Oslo, said in an interview. “The longer these developments go on, the greater the risk is of a severe imbalance evolving.”

Norway’s credit and property markets continue to show signs of overheating five months after the regulator asked banks to tighten lending standards. Robert Shiller, the co-creator of the S&P/Case-Shiller home-price index, said in January Norway is in the grip of a house price bubble, while the International Monetary Fund on Feb. 2 warned of real estate and credit market risks in Norway.

“Soaring household debt and home prices are a good reason for concern,” Baltzersen said. “Both the household debt-to- income ratio and the house price level have reached historic records and household debt is still growing faster than income.”

The central bank estimates private debt burdens will grow to about 204 percent of disposable incomes this year. That compares with a ratio of about 150 percent in the late 1980s, just before Norway’s property bubble burst and average house prices slumped roughly 40 percent, Baltzersen said.


“There are differences,” he said. “What we had then was two to three years of excessive debt growth in the mid-1980s due to a deregulation of the banking sector, which led to an extreme boom followed by a collapse of home prices.”

Those events sent the economy into a recession and triggered a banking crisis in the 1990s. The FSA in December turned its recommendation that credit standards be tightened into an official guideline and told banks to cap loan-to-value ratios at 85 percent from 90 percent. Baltzersen said there are no plans to enforce more rigorous standards.

“There are definitely ways to stop credit growth from rising, in particular through changes on the tax side, for example, on interest rate cost deductions,” said Erica Blomgren, chief strategist at SEB Merchant Banking in Oslo. “However, I don’t expect that to be implemented anytime soon with the general election coming up next year.”

2013 Vote

The government of Prime Minister Jens Stoltenberg, which was re-elected in 2009 after pledging to improve welfare services, faces a parliamentary vote by September 2013.

“I don’t expect the government to curb the rise in household credit growth,” Blomgren said.

The FSA’s decision to ask banks to curb lending has yet to filter through to credit markets, according to Blomgren.

Norway’s house prices rose an annual 8.4 percent in January, according to the Real Estate Brokers Association, while consumer credit growth hovers at more than 7 percent. Household debt is growing about three percentage points faster than incomes, Baltzersen said.

“As long as debt grows faster than income, the ratio continues to rise,” he said.

While Finance Minister Sigbjoern Johnsen has said he doesn’t want to use the word “bubble” to describe what’s going on in Norway’s property market, he says the development is a “concern” for the government. He told homeowners this month to make sure they’re also prepared for a drop in house prices.

‘Fierce Competition’

Norway’s biggest bank, DNB ASA, said Feb. 9 profit in the fourth quarter fell 24 percent, less than analysts estimated. Loan losses jumped 75 percent to 926 million kroner ($161 million) and Chief Financial Officer Rune Bjerke predicted impairments will remain at that level in 2012.

“Fierce competition” amongst Norway’s banks means cheap credit designed to lure borrowers will continue to be made available, Baltzersen said. “Our main concern is that there is competition on stretching lending limits.”

In contrast to its debt-laden household sector, Norway’s government boasts the biggest budget surplus of any AAA rated nation, according to Fitch Ratings. Thanks to Norway’s $560 billion sovereign-wealth fund, it has no net debt.

Still, the country’s government bonds have fallen since Shiller last month warned of an asset bubble. The yield on Norway’s benchmark 10-year note rose to 2.41 percent at the end of last week, compared with a low of 1.82 percent on Jan. 16.

Hamstrung Governor

The central bank has signaled it doesn’t want Norwegian interest rates to stray too far from official borrowing costs in Europe, hamstringing Governor Oeystein Olsen in his efforts to prevent an asset bubble at home.

Policy makers at Norges Bank in December lowered the benchmark deposit rate by half a percentage point to 1.75 percent, their first cut since June 2009.

Shiller, an economics professor at Yale University, said in an interview last month he found it “quite amazing” that Norway’s home prices keep testing new records, and warned housing inflation is faster in the Nordic country than it was in the U.S. before the subprime bubble burst.

“In Norway it looks like a bubble to me,” Shiller said Jan. 13 in Oslo. “So the collapse of that bubble, that’s dangerous to any economy, to see such a major event unwind.”

--With assistance from Josiane Kremer in Oslo. Editors: Tasneem Brogger, Frances Schwartzkopff.

To contact the reporter on this story: Adam Ewing in Stockholm at

To contact the editor responsible for this story: Tasneem Brogger at

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