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Household debt hits record high

As Norway’s central bank board prepared for its latest evaluation of interest rate levels Wednesday afternoon came a report that likely won’t surprise anyone trying to buy a home: Norwegians’ debt burden is higher than ever before, mostly because interest rates are relatively low and housing prices have been steadily rising for years.

Even small apartments, like in this new housing complex on Oslo's east side, can cost several million kroner, forcing young buyers to take on big mortgages. PHOTO: Views and News

Newspaper Aftenposten reported Wednesday that around 250,000 Norwegian families are now carrying debt that exceeds the recommended maximum level of roughly three times household income. They’re carrying five times as much debt as disposable income. The total number of Norwegians viewed as being heavily in debt has more than doubled in the past decade.

According to current figures from the central bank (Norges Bank), debt levels are rising twice as quickly as income levels. Total household debt levels are now twice as high as disposable income after tax and interest rate costs.

With housing prices soaring over the past few years, first-time home buyers feel compelled to take on huge mortgages in order to buy even a small apartment. Sometimes they’re aided by parents who have lots of equity in their own homes, and who either guarantee the loan or borrow themselves.

Home equity loans also have become far more common in Norway in recent years, often used to finance home improvements, new cars or even holidays and consumer spending. That also has boosted overall debt levels.

The high housing prices in most Norwegian cities have also made it more common for banks to allow borrowers to make very small payments on the actual loan amount (avdrag) or even pay interest only. Since interest payments can still be deducted from taxable income in Norway, debt effectively carries tax incentives while savings are taxable.

Financial regulators carried out a survey last fall of more than 4,000 home loans made by Norway’s 30 largest banks. Fully 34 percent of the loans were equal to more than 90 percent of the home’s purchase price, according to the study by Finanstilsynet. Of borrowers under age 35, nearly half had made less than a 10 percent down payment on their home payment, and also were borrowing more than 90 percent of its purchase price. In one-sixth of the loans, borrowers were paying interest only and not reducing the principal amount of the loan at all.

Both the banks and the borrowers justify the relatively high debt levels based on high rental rates, especially in Oslo, and the feeling that in the long run, it’s better to buy a home than to rent one. A current housing shortage in Oslo is also boosting prices through the forces of supply and demand, and most real estate analysts see no end in sight, suggesting that borrowers’ equity will increase and that even with a big mortgage, a home purchase remains a good investment.

The risk remains that interest levels may rise in the long term, with older borrowers remembering the double-digit rates of the 1980s and 1990s. Consumer advocates caution that borrowers should be prepared to handle higher mortgage payments if rates go up.

Most analysts and economists, meanwhile, expected the central bank board to once again keep Norway’s key lending rate at is current level of 2.25 percent on Wednesday, while some were urging the board to reduce it. The board ultimately decided to leave rates unchanged.

The bank board earlier had intended to steadily raise interest rates, to cool down an otherwise hot Norwegian economy and stem spending, but that strategy was reversed because of the European and US debt crises. Higher interest rates would further strengthen the Norwegian krone, a currency already seen as so strong that it’s hurting exports and local industry.

Views and News from Norway/Nina Berglund
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