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Norway Banks Under Pressure as Asset-Bubble Risks Swell

July 09, 2012

Norway Banks Come Under Pressure as Housing-Bubble Risks Swell

Norway has watched property values soar even during the euro area's debt crisis, as borrowers lean on near record-low interest rates and Europe’s lowest unemployment rate. Photographer: Tomm W. Christiansen/Bloomberg

Norway’s Finance Minister Sigbjoern Johnsen is putting pressure on the country’s banks to rein in mortgage lending to over-indebted households as the government grapples with the growing threat of a property bubble.

Banks have “an obligation to say to people I think that by taking a loan this size you might get water over your head,” Johnsen said in an interview in Oslo. “Norwegian households have never had such a high proportion of debt compared to their net income, so that requires a keen eye and some concern.”

The country’s financial regulator and economists including Yale University’s Robert Shiller have urged Norway’s government to take seriously the threat of a full-blown housing bubble and its disruptive potential. Europe’s second-largest oil and gas exporter has watched property values soar even during the euro area’s debt crisis, as borrowers lean on near record-low interest rates and Europe’s lowest unemployment rate.

Norway’s housing market boom has seen property prices surge almost 30 percent since 2008, while the country’s household debt burden will surpass 200 percent of disposable incomes next year, according to central bank estimates.

“It is important that one is aware of the fact that interest rates will go up again at some stage,” Johnsen said.

The three-month Norwegian interbank offered rate was quoted three basis points higher today at 2.29 percent, bringing the spread to the equivalent euro-zone rate to the widest since Dec. 14, according to data available on Bloomberg. The krone gained 0.1 percent against the euro to 7.5087 as of 12:18 p.m.

The central bank has signaled it may start raising the main deposit rate from its current 1.5 percent as early as December.

Supply Issue

DNB ASA (DNB), Norway’s biggest bank, is “definitely” applying the stricter lending guidelines recommended by the financial regulator, spokesman Thomas Midteide said in March. DNB says mortgage rates have also risen to track higher funding costs.

Aside from putting pressure on the banks, the government is also exploring the option of raising the supply of housing to ease pressure on prices.

“There is a rather huge gap between the supply and demand of houses and flats,” Johnsen said. “It is this imbalance in the supply of houses that needs to be addressed.”

The central bank, which cut rates over two meetings in December and March to cool the krone’s appreciation and protect exporters, has since signaled it is shifting its focus to the domestic economy amid growing signs of overheating.

Bursting Bubbles

Norway’s Financial Supervisory Authority last year pushed through guidelines for banks, urging them not to grant loans that make up more than 85 percent of a property’s value.

Yet the stricter standards have so far failed to cool the property market and prices rose an annual 7.7 percent in June to a record, according to the Real Estate Brokers Association.

Against a backdrop of record private debt loads, banks should warn home buyers of the “kind of burden” they face when they take on mortgages, Johnsen said.

The central bank estimates average household debt burdens will rise to 197 percent of disposable incomes already this year. Household credit growth accelerated to an annual 7.1 percent in May, according to Statistics Norway.

Today’s private debt levels compare with an average of about 150 percent in the late 1980s, just before Norway’s property bubble burst. That event triggered a slump of about 40 percent in house prices into the start of the following decade, according to the FSA.


According to Johnsen, “households’ ability to service their loans is much better today than it was in the late 80s and early 90s due to the lower interest rates.”

Shiller, the co-creator of the S&P/Case-Shiller home-price index who predicted the U.S. subprime mortgage collapse, in January told Norway’s government to “start worrying now” about the pressures in the housing market.

The Organization for Economic Cooperation and Development has also warned that high household debt and elevated house prices are “vulnerabilities that macro-prudential policy and consumer protection should address.” The Federal Reserve of San Francisco in a paper dated June 25 singled out Norway as an example of a country that may be in the grip of a housing bubble.

“The OECD has pointed out that we have a challenge in the housing sector with the high degree of household indebtedness,” Johnsen said. “To get this from different sources really underlines that this is also a matter of concern for the ministry.”

To contact the reporter on this story: Josiane Kremer in Oslo at

To contact the editors responsible for this story: Jonas Bergman at;

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