Sky-high home prices spark concern
May 20, 2011
Norway’s residential real estate market has never been hotter, report brokers and bankers, and concerns are rising that it may boil over and go from boom to bust in the next few years. State authorities are setting in measures to try to cool things down.
Housing prices have been soaring, even during the global finance crisis that didn’t hit Norway very hard. Now, with most properties selling for well above appraisal after hefty bidding rounds, prices have become so high in Oslo that many people are either being priced out of the market or taking on extremely high debt.
“I feel sorry for families with small children” 70-year-old Ragnhild Løvås told newspaper Aftenposten earlier this week. She’s lived in a “completely normal” row house in Oslo’s Skøyen district since buying it at cost from her husband’s employer in 1972. A comparable row houses in the neighbourhood, sized at just 120 meters (about 1,200 square feet) just sold for NOK 6.64 million (USD 1.2 million), a new record.
“I think they’re paying a bit much,” agreed neighbor Helge Skotterud. Last year, a similar row house in the area sold for NOK 5.6 million.
Average housing prices have increased by another 8 percent during the past year, according to figures released this week, and prices have continued to rise since January. If the rate of price rises were to continue, though, it will be harder and harder for buyers, especially first-time buyers, to qualify for loans. Borrowers are already paying a much larger percentage of their household income meeting mortgage payments than they were a few years ago.
Rising debt levels have raised concerns by officials at Norway’s central bank, Norges Bank, which recently raised interest rates a quarter-point and now wants the state to impose stricter lending rules on commercial banks. While the banks continue to report strong profits and insist they’re not over-lending, Norges Bank wants to lower the growth of their loan portfolios, reports newspaper Dagens Næringsliv (DN).
Today, for example, banks can lend NOK 1 million based on just NOK 3,600 in collateral, according to DN. Historically low loan-loss levels in Norway have allowed low levels of risk capital, but now the central bank wants tougher measures.
“We have sent a letter to the authorities, where we advise that the risk protection regarding home loans should be increased,” Jan F Qvigstad, vice chairman of the central bank, told DN. A new report from the central bank says that while the outlook for Norway’s economy remains strong, the one danger area involves high household debt levels. Households will be much more vulnerable to the interest rate increases that are due to come. Central bank boss Øystein Olsen has warned that mortgage rates will likely be double what they are now in around five years.
Analysts and economists think housing prices will decline after they reach the proverbial boiling point. With debt levels and housing prices rising much faster than household income, the stage could be set for a major downturn, they fear.
They contend the question is when, not if, Norway’s hot real estate market will be hit by a cold shower. Steinar Juel, chief economist at Nordea Bank in Norway, predicts it will come in 2013-2014, with a price fall of as much as 15-20 percent.