1

Det norske boligmarkedet – på vei mot en boble?

Steinar Juel, chief economist26. november 2009

2

Norway: Home ownership is most common

• An unprofessional rent market

• No regulations on rents

• Housing co-operatives mainly in larger cities

• No regulations on sales prices

Owner occupied

63 %

Rented23 %

Housing co-operative

14%

3

The tax system favours home ownership

• Interest expenditure deductible from taxable income. No upper limits

• No tax on capital gains when selling a house/apartment the owner has lived in one of the last two years

• No state housing tax. About 50% of the municipalities have local housing tax (Maximum 0.7% of 75% of estimated market value)

• Low valuation of houses when wealth tax is levied (about 20% of market value)

4

A majority of detached houses, but strong growth in multi-apartment buildings

• Demographic reasons

• And on average, 20-25 % of households also have a cabin/second home

– Number of cabins grown by 12 % the last 8 years

Types of homes (2001)

Detached houses57 %

Two dwelling houses

8 %

Row houses13 %

Appartments22 %

5

Banks are the main providers of home mortgages

• Mortgage institutions (bank owned) have grown in importance recently

– Market for covered bonds

• 93 % of households’ debt is at floating rate (Fixed for less than 12 months)

– A small share in foreign currencies

Share of home the mortgage market

Banks

Mortgage institutes

State banks

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

Sep-09

Sha

re o

f out

stan

ding

mor

tgag

es

6

House price development important for the economy

• Contributed significantly to economic growth up to 2007

– Construction and consumption

• IMF (advanced economies): Effects after a year of 10% decline in house prices:

– GDP down 2%

– Private consumption down 2 1/2 %

– Residential construction down 15%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 082

3

4

5

6

7

8

2

3

4

5

6

7

8

Residential investments in percentage of GDP

Average Norway 1985-

Denmark

Finland

Sweden

Norway (mainland)

7

Not financial crisis in NorwayLessons from the 1988-93 banking crisis still remembered

• Acute liquidity crisis autumn 2008, which was handled

• Banks had no investments in subprime bonds or other toxic assets

• Limited investments in other negotiable papers

• Limited loan losses, higher pre loss earnings

Bank results and loan losses in percent of total assets

-3

-2

-1

0

1

2

3

4

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Per

cen

t

Result before tax Loan lossesSource: Kredittilsynet

8

Banks continued to function well, but became more careful after Lehman Brothers

• Smaller share of new mortgages with Loan-to-value (LTV) above 80 % of prudent valuation

• Reduced willingness to finance a new home before the existing was sold

• It is normal that banks are more careful during downturns

Loan-to-value distribution new mortgages

27.2 % 26.1 % 29.0 %

32.6 % 31.1 %38.4 %

26.4 % 29.7 %22.1 %

13.8 % 13.0 % 10.4 %

0 %10 %20 %30 %40 %50 %60 %70 %80 %90 %

100 %

2007 2008 2009

0-60 60-80 80-100 Above 100Source: Kredittilsynet

9

Growth in lending have declined, but mainly because of reduced demand

• Not credit crunch

• Reduced investments, normal in downturns

• Growth in lending to households has levelled out about 6 ½ %

Source: Reuters EcoWin

00 01 02 03 04 05 06 07 08 09-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

22.5

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

22.5%% å/å

Non-financialcompanies

Total

Domestic credit growth

Households

10

Mild effects on the Norwegian economy

05 06 07 08 09-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

GDP Euroland

% q/qGDP Mainland-Norway

Source: Reuters EcoWin

02 03 04 05 06 07 08 09-35.0

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

-35.0

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

Industri investeringer

% y/y

Sverige

J apan

Germany

*3 months moving average

Sweden

Manufacturing production*

Norway

11

Unemployment increased less than expected

• ..and came from an unsustainable low level

• Employers have been hoarding labour

• Unemployment will probably increase somewhat more, but still be at a low level

04 05 06 07 08 09

2

3

4

5

6

7

8

9

10

11

%Ledighetsrate- sesongjustert

* 6 mnd gl. gjennomsnitt

Sverige *

USA

Euroland

Norge

12

But strong policy measures

0

1

2

3

4

5

6

Norway(mainland)

Sweden Denmark Finland USA EMU

% of GDP

Change in structural budget balance in 2009

Sources: OECD Economoc Outlook no 86aug

06nov

07feb mai aug nov

08feb mai aug nov

09feb mai aug nov

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

Norges Bank

%

ECBFed

Monetary policy rates

Riksbank

13

High debt and floating mortgage rates; rate cuts have strong effects

• Among the highest debt/income rates in the world (Higher in Denmark)

• Make households more vulnerable, especially when most of the debt has floating rates

• Norges Bank would like the ratio to go somewhat down

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08110

120

130

140

150

160

170

180

190

200

110

120

130

140

150

160

170

180

190

200% %

Households debt relative to disposible income

14

The crisis halted a gradual decline in house prices

• House prices went up again when the interest rate was slashed

• Pre crisis, interest rate was increased to cool down the economy

– A controlled decline in house prices was welcomed

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0930

40

50

60

70

80

90

100

110

120

130

140

30

40

50

60

70

80

90

100

110

120

130

140

Average house prices

Index2000=100

15

Innovations in the mortgage market contributed to house price increases

• Mortgage credit line introduced in 2005

– Popularity exploded

• Not repayment plan, similar to an overdraft facility

• Renewed typically every 10 years

• Similar products in other countries:

– Interest only loans in Denmark

– Flexi loans in UK, Australia and New Zealand

Type of mortgage

Credit lines22 %

Repayment loans78 %

16

The repayment periods have increased

• 25-30 years is now quite common

• Quite normal internationally

• Early 1990s’, Above 20 years was seldom

• Longer repayment periods that households are able to live with higher debt

Loan periods for various LTV ratios

Source: Kredittilsynet

17

Norway: Elevated house prices, but not bubble - yet

Source: IMF weo Oct 2009Source: IMF weo Oct 2009

18

Conclusions

• Not financial crisis and mild downturn in Norway

• Lessons from the 1988-93 banking crisis are still remembered

• Norges Bank’s rate cuts in response to the international crisis have postponed an adjustment in households’ debt and in house prices

• Elevated house prices and household debt, but no bubble

• Changes in the structure of housing finance encouraged by measures taken to remedy liquidity crisis

• Lesson from the 1988-93 banking crisis; Losses on home mortgages did not kill the banks, but the repercussions on the business sector, including on commercial real estate

20

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