Despite economic uncertainty, Norwegians continue to take on more household debt to finance high housing prices. Overall debt is now rising faster than income, and the combination of mortgage obligations and record high prices has spurred new warnings of a real estate crash.
The warnings came this week in a new financial outlook published by the state regulatory agency Finanstilsynet. The rising debt levels are believed to have been fueled by record low interest rates and predictions that rates will stay low for many years. That carries risk, though, according to Finantilsynet’s director, Morten Baltzersen.
“When debt continues to increase more than income, and housing prices continue to increase from a high starting point, the risk grows that this will result in a price crash in the real estate market,” Baltzersen told news bureau NTB.
Tradition of home ownership
Norwegians have long had high debt levels, because of the country’s strong tradition of home ownership and the tax advantages of real estate investment. Even though housing prices recently registered a month-to-month decline, they’re still up over last year, and way up from the years before that.
A real estate crash would set off more ripple effects in an economy already feeling the chill from the dive in oil prices. “We’re not predicting a crash,” Baltzersen hastened to add, ” but we’re pointing out the risk that lies in the high debt build-up and the high real estate prices.”
Norway’s banks remain highly profitable, even after being hit with tough capital requirements a few years ago. Carol O Geving, head of the Norwegian real estate brokers’ association (Eiendomsmeglerforbund), said the industry has a feeling that banks are now being more careful in their lending practices, especially to young first-time homebuyers with uncertain earnings outlooks.
“It’s actually a paradox that mortgage debt continues to grow faster than income in this country, when there is such great uncertainty on all fronts,” Geving told NTB.
Some would argue it’s the brokers themselves who push up housing prices, through ever more elaborate marketing of properties and short deadlines for bidding rounds. That puts pressure on buyers, many of whom submit high bids without even thoroughly checking, or having a chance to check, the physical property.
It can also be argued that Norway’s tax system still encourages debt, especially mortgage debt. Norwegians can write off what they pay in interest rate expense, property tax is low or non-existent in many communities, asset values on a home are set at only around 25 percent of market value for fortune tax purposes, there’s no income tax on renting out parts of a home and little if any capital gains tax when a property is sold. Steadily rising prices have also made housing one of the best investments available to Norwegians in the long term, even though now prices are so high that young people entering the housing market almost always need help from their parents or grandparents.
That investment advantages of borrowing to buy a home could change in the event of a crash, especially if borrowers are left with homes worth less than the amount of their mortgages. The finance regulators also stress in the report how the fall in oil prices is affecting the Norwegian economy. It has led to lower housing prices in places like Stavanger and Kristiansand, where the most oil industry layoffs have occurred.
“But so far, the ripple effects have been limited,” Baltzersen said. “We have seen that growth in the Norwegian economy is lower and unemployment higher, but we have no crisis.” He’s the latest of long string of economists to say the same.