Norway's housing boom needs further cooling

OSLO Mon Sep 30, 2013 12:39pm EDT

Director General of the Financial Supervisory Authority of Norway Morten Baltzersen speaks at a news conference in Oslo September 9, 2013. REUTERS/Terje Bendiksby/NTB Scanpix

Director General of the Financial Supervisory Authority of Norway Morten Baltzersen speaks at a news conference in Oslo September 9, 2013.

Credit: Reuters/Terje Bendiksby/NTB Scanpix

OSLO (Reuters) - Norway's housing market remains on an unsustainable path and banks need to hold even more capital to cushion against risks from the property boom, the head of the country's financial regulator said on Monday.

The housing market has been cooling down, showing that actions by the regulator over the past two years have begun to bear fruit but the slowdown is not enough, Morten Baltzersen, the head of Norway's financial regulator, told the Reuters Nordic Investment Summit.

"House prices are still growing from record high levels, and the price growth over the past years has been very high both by historic and international comparison," Baltzersen said at the summit.

The International Monetary Fund warned earlier this month that Norwegian housing prices could be as much as 40 percent overvalued, leaving the economy vulnerable to a large price correction. Norwegian households are among the most indebted in the world with a debt to income ratio of around 200 percent, more than twice that in Germany.

Baltzersen said these developments were not sustainable in the sense that the longer house prices and debt increase more than nominal income, the higher the risk is for an abrupt and severe consolidation of the household sector which would impact the entire Norwegian economy.

Property prices rose by 3.9 percent in August versus a year earlier but credit growth remained above 7 percent, nearly twice the rate of income growth.

LEAN AGAINST THE WIND

Bank are highly profitable and meet all regulatory minimums but given such debt levels, there is a need to build more reserves, Baltzersen said.

He said more measures were needed to cool the market and protect the banks. These would include an increase in the level of risk weightings banks apply to home loans and a countercyclical buffer that requires banks to build up capital in good times to prepare for future troubles. Both measures have already been proposed but not yet finalized.

"We should lean against the wind still to accumulate more capital in the banks while the times are good," Baltzersen said.

He said it was increasingly acknowledged internationally that banks' internal risk models underestimated risks and undermined capital requirements. "There's a growing recognition internationally that models don't adequately reflect relevant risk, particularly systemic risk."

The regulator has already told banks to reduce the loan to value ratio on mortgages to 85 percent from 90 percent and forced them to hold more capital, a measure that prompted banks to raise mortgage rates even though central bank rates have not changed.

But the impact of these measures has been diluted by Norway's strong fundamentals, such as low unemployment, high wage growth and immigration, which have all fuelled the property market.

"Remember that the Norwegian real economy was only slightly affected by the international financial crisis ... (so) the Norwegian economy has more or less been soaring for 20 years," he said.

Norway escaped the global financial crisis relatively unharmed thanks to its massive offshore oil sector, stable government finances and a rainy day wealth fund which has accumulated more than $150,000 for each of Norway's 5.1 million people.

Baltzersen said market participants forecast a soft landing for the property sector, with stabilizing prices and debt levels and given the various measure in place, the regulator has no reason to dispute these projections.

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(Editing by Stephen Nisbet and Jane Merriman)

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