Norwegian house prices may fall “markedly,” threatening to expose the economy to “substantial” knock-on effects, the financial regulator said.
The overheated housing market is the biggest domestic threat to the economy, the Oslo-based regulator said today in a statement. Households have swelled their debt loads and grown more reliant on interest-only loans as they assume rates will remain low, the regulator said.
“This has contributed to pushing debt and house prices to a very high level in historical terms,” the regulator said. “The international downturn has encouraged expectations that interest rates will remain low for a long period in Norway as elsewhere. Expectations of continued low interest rates and high income growth are sustaining the demand for loans.”
Policy makers in the world’s seventh-largest oil exporter are struggling with a potential property bubble, which Robert Shiller, the co-creator of the S&P/Case-Shiller home-price index, has called “dangerous.” Private debt levels have risen to their highest since at least 1988, the central bank estimates, and house prices rose an annual 7 percent last month, according to the Real Estate Brokers Association.
While households are backed by “high” savings ratios, these assets are tied up in real estate and pensions, the FSA said. The regulator said it’s closely monitoring how banks comply with a guideline introduced in December of limiting mortgages to 85 percent of the value of the home.
The Norwegian economy, home to oil producer Statoil ASA, has withstood Europe’s debt crisis as a jump in crude prices is spurring record investments this year in offshore oil and gas fields. Norwegian manufacturing accelerated at the fastest pace in nine months in February and consumer confidence improved in the first quarter as unemployment hovers below 3 percent.
The regulator also said that the country’s banks will need to build up their equity further to prepare for “increased losses and reduced profitability.”
“It is encouraging that Norwegian banks are devoting the bulk of last year’s buoyant profits to bolster their equity capital position,” Morten Baltzersen, director general of the authority, said in a statement. “At the same time we need to allow for the possibility that the Norwegian economy will be harder hit by the international turbulence.”
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