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Household debt hits record levels

Norwegian homeowners’ debt levels have skyrocketed over the last eight years, with some now paying down mortgages that are three times larger than average loan amounts in 2004, according to fresh data. On average, mortgage amounts are up 55 percent in just five years, and consumer debt has risen as well, but Norwegians are still faring better than most, helped by a strong economy, low interest rates and a low unemployment rate.

Housing construction isn't keeping up with demand in Oslo, putting more upwards pressure on prices. PHOTO:
Sky-high prices for new housing units in Norway have led to a big jump in household debt levels, but most borrowers seem to be coping with the higher costs. PHOTO:

Home mortgages have increased in all population groups as a result of a sharp rise in housing prices in recent years, according to new data released by Statistics Norway (Statistisk Sentralbyrå, SSB). The average mortgage carried by families with children under the age of seven has tripled in eight years, rising to around NOK 2 million (USD 365,000), up from NOK 730,000 (USD 133,000) in 2004. For couples without children and below the age of 45, debt has risen to the same level, up from around NOK 630,000 in 2004, SSB said. Housing expenses have also increased, but not at the same rate.

“This has not affected the structure of ownership, where eight out of 10 are owner-occupants,” SSB stated in a press release, adding that Norway’s high ratio of homeowners has remained stable over the last 15 years.

The sharp rise in housing prices in recent years is a recurring topic in Norway. The IMF, the OECD and several international economists have warned about the risk of a residential real estate “bubble” that can pop, considering the high level both of household borrowing and housing prices. “Housing prices and debt are closely linked,” chief economist Øystein Dørum at DNB Markets told newspaper Aftenposten, pointing to a nationwide average housing price of NOK 30,000 per square meter in 2012 compared to NOK 17,000 in 2004. In urban areas such as Oslo, it’s not unusual for homes to cost around NOK 50,000 per square meter. “To be able to enter the real estate market, it’s necessary to borrow heavily,” Dørum said.

Record low interest rates have taken some of the sting out of such borrowing and despite the higher debt levels, Norwegians can cope more easily than before. Low unemployment, rising wages, the low interest rate levels and a strong underlying economy that withstood the major effects of the financial crisis make the extra debt an easier load to carry, and another recent study showed that Norwegians are now saving more of their expendable cash than they did in earlier years.

What still worries politicians and financial authorities are families with very high debt relative to their income, according to Aftenposten.

Likely to rise further, but not at the same pace
Housing prices are likely to continue to rise in 2013 after a 6.7 percent rise in 2012 compared to 2011, according to most real estate experts, although not necessarily at the same pace. Prices over recent years have been boosted by a strong economy and the central bank has kept interest rates low in a bid to prevent Norway’s currency, the krone (now trading near all-time highs against the euro), from strengthening further.

Norway’s national real estate association EFF (Eiendomsmeglerforetakenes Forening) reported in January that underlying market conditions would warrant an increase in housing prices of 8-10 percent in 2013, but noted that various measures from the government will mean higher borrowing rates and thus lower property price growth, according to news agency Reuters.

Norway’s largest commercial bank, DNB, warned last week that because of stricter capital demands and new regulations, banks are forced to increase their margins. This could mean higher borrowing costs for customers even if the Norwegian central bank (Norges Bank) continues to keep its interest rate unchanged.

Norges Bank has warned of a potential rate hike, possibly in March, in a bid to cool the hot economy despite the strong krone, which should in turn help to calm the real estate market. However, opinions diverge among economists about when a rate hike is likely, with many saying they do not expect the central bank to hike rates that soon.

Views and News from Norway/Aasa Christine Stoltz

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