Real estate brokers, bankers and borrowers alike are not laying out the welcome mat for strict new residential lending rules proposed by Norwegian finance regulators. The new rules are aimed at lowering Norway’s record-high housing prices and warding off a debt crisis, but critics are far from convinced they’ll have the desired effect.
Protests started pouring in to Finance Minister Siv Jensen as soon as she was handed the proposed rules from state financial regulator Finantilsynet. On Wednesday, local newspapers were full of stories about young first-time homebuyers who now fear that it will be even more difficult to break into the housing market. Bankers complained they’ll be stripped of their ability to determine credit-worthiness while professors warned the new rules will increase social differences and questioned whether housing prices will actually decline.
Jensen, who worries about Norway’s ever-rising levels of household debt, had asked the regulators to come up with proposals and will now put them out for public hearing. They’re bound to attract plenty of comment.
The rules would basically tighten qualifications for home mortgages. Loan applicants would, among other things, need to pass a “stress test” of sorts to prove they could tolerate an interest rate hike of six percentage points. Interest rates are currently at record low levels (around 3 percent) and analysts have been predicting all week that Norway’s central bank will trim rates again on Thursday, after a meeting of the bank’s board. The regulators, and Jensen herself, fear what will happen if interest rates were to suddenly shoot up like they have in the past, demanding much larger monthly payments from borrowers with large loans needed to finance high housing prices.
The new rules would also demand that borrowers pay off at least 2.5 percent of the principal amount of their loan every year from the first year, when their payments mostly go towards covering interest costs. The goal is to do away with loans that allow payments to cover interest costs only.
Current requirements that borrowers must have capital (and be able to make an initial down payment) equal to 15 percent of the price of the home would be extended and raised on some types of loans, while the regulators also recommend requiring collateral in other real estate if borrowers seek a loan that amounts to more than 85 of the home’s market value.
Harald Magnus Andreassen, the often-quoted chief economist at Swedbank First Securities, thinks such measures would curb the growth of Norway’s housing prices and debt levels. He told newspaper Dagsavisen that the proposals represent a “sensible tightening of lending practices” that would lower risks to the financial system. He acknowledged that neither bankers nor borrowers will like them, but said they are “necessary … because the costs can be very high if far too many borrow too much.”
That didn’t quell protests from bankers like Jan Kleppe of Bamble Sparebank, for example, who told newspaper Dagens Næringsliv (DN) that “we’ll be turned into robots. We don’t like to follow rules that limit our ability to be bankers and make professional assessments.” Other banks operating in rural areas protested that they would be “punished” by the high housing prices of Norway’s larger cities like Oslo, Bergen and Stavanger, where housing prices are highest.
Tone Lunde Bakker, head of operations for Danske Bank in Norway, told DN it was “critical” that financial institutions be allowed to make their own credit evaluations. The rules, she fears, will stifle competition among banks and allow them less latitude to determine creditworthiness among a wide range of customers.
‘Better to boost housing supply’
Idar Kreutzer, head of the employers’ organization in the finance industry, Finans Norge, doesn’t believe the new rules will reduce housing prices. That’s a result of too little supply and high demand, he and many others stressed. “It’s a paradox that (the regulators) still propose such a tightening of credit evaluation,” Kreutzer told Dagsavisen, arguing that won’t increase housing supply if the market contracts.
Professor Ragnar Torvik at NTNU in Trondheim told DN that he can see the need for measures to reduce debt, but he thinks changes to the tax system are a better option. The current tax system, which allows borrowers to write off their interest costs, encourages debt, while Torvik thinks taxes are too low regarding residential investment. The rules as proposed now, he fears, will increase social differences, but Finance Minister Jensen rejects raising or imposing new property taxes.
Meanwhile, 23-year-old Oda Ystrøm feared she and her partner will be aced out of buying anything in Oslo, where even just a two-room flat can cost millions. They have NOK 500,000 for a down payment, “but the new rules would make it much more difficult for us to qualify for the loan payments we otherwise would have had,” she told DN. She worries students will be forced out of the market entirely. They face waiting until they are older and better established, as is the case in most other countries around the world.