OSLO, Feb 2 (Reuters) - The International Monetary Fund cut its growth forecast for safe-haven Norway on Thursday and said a housing bubble that threatens everything from banks to economic growth is the biggest risk for an otherwise healthy economy.
Norway, a bolthole for investors thanks to its oil-driven prosperity, is struggling to contain the kind of pressure in the housing market that led to four years of global financial turmoil.
The IMF said Norwegian house prices were 15 to 20 percent overvalued while the house price-to-income ratio is 28 percent above the historical average — and even higher than before the last house price crash in the early 1990s.
“A house price bust would likely be associated with depressed economic activity and increased financial sector stress, especially given high levels of mortgage debt,” the IMF said in a staff report.
House prices are seen growing almost twice as fast as wages this year, Statistics Norway predicted earlier, and household debt is set to top 200 percent of disposable income, more than twice that in Germany and a third more than the peak in the U.S. before its crash.
“With housing valuations elevated, there is a significant risk of a large price reversal, which would depress residential investment and dampen consumption via wealth effects,” the IMF said.
“Households do not have a large equity buffer in the event of a fall in house prices, which could lead to higher default rates, placing stress on bank balance sheets,” the IMF added.
Earlier on Thursday, Norwegian Finance Minister Sigbjoern Johnsen welcomed growing optimism over the economy thanks to a resurgent oil sector and rising factory orders, but he warned about the risks of surging house prices and household debt.
At the heart of Norway’s problem is its relative economic success.
A massive oil sector, a $570 billion wealth fund and no public debt make the country a target for safe-haven investors, forcing the central bank to keep interest rates exceptionally low to stop the national currency from firming too much.
The IMF said growth on the mainland, which excludes the lucrative oil sector, is seen at 2.2 percent, below the 2.5 percent forecast in November, but still well ahead of the euro zone which could contract by 0.5 percent.
Housing prices rose by 8.4 percent in December compared to a year ago to hit a new record high while household borrowing rose 7.3 percent, well ahead of wage growth.
If house prices fall 10 percent, that could cut GDP growth by a full percentage point and leave the banking sector vulnerable, the IMF said.
To reduce risks, Norway needs to more closely enforce recently tightened lending guidelines and must lower public spending beyond 2012 to allow central bank rates, and thus mortgage rates, to remain low. (Reporting by Balazs Koranyi; Editing by Hugh Lawson)