(Bloomberg) -- Norway’s banks may face higher risks from a potential home price rally in a nation with the most indebted households in the developed world, its financial watchdog warned.
The planned easing of lending regulations from January would boost housing valuations, Per Mathis Kongsrud, director general of the Financial Supervisory Authority, said in an interview in Oslo. Should the expected reduction in credit costs turn out steeper than projected, it could lead to “a rather sharp” rise in home prices, he said.
Even as the debt-to-income ratio of Norwegian households has improved in the last couple of years, it remains the highest among the members of the Organisation for Economic Cooperation and Development, at 238% last year. Together with the high property prices, it’s also the main risk for the country’s financial system and may stay close to today’s levels in an adverse scenario, according to the watchdog.
“It is clear that when you soften the requirements in the regulation, you can get more people with very high debt,” Kongsrud said, referring to the Finance Ministry’s decision this week to reduce the home loan equity requirement to 10% from 15%. “This means that the vulnerability can still increase even if total debt doesn’t rise a lot because there will be more people with smaller buffers, and a little less to go on if there is a setback.”
Average housing prices may surge by as much as 57% over the next four years, assuming the benchmark rate of Norges Bank and the three-month Euribor will be 2 percentage-points lower than in the base scenario by 2028, according to calculations published by the watchdog on Thursday. That compares with a baseline scenario of 12.6% increase over the same period, the FSA said. Norges Bank projects a 5-8% annual increase through 2027.
The data factors in a change to equity requirements, a move backed by the central bank, while the watchdog didn’t recommend against any other major changes. The calculation still shows debt-to-income ratio declining to about 223% by 2028 in the worst-case scenario, compared with 205% in the base case.
Similar to elsewhere in the world, the tighter interest rate environment of the recent past has prompted “a bit of tough time” for some Norwegian property developers, Kongsrud said. Still, Norway has bucked the general trend with “good activity and demand for commercial premises” that’s raised rental income, he added.
While the indebtedness of many real estate companies creates a vulnerability, Kongsrud said the level of bankruptcies in the sector isn’t a surprise and is only “of limited” significance for financial stability. Even so, he said the sector has to be followed “closely.”
“One might be worried about the risk of a broader setback where you get more extensive bankruptcies in retail trade, and possibly construction, and where there will be vacant space and where it will be difficult to rent out office space,” he said. “So far, the Norwegian economy has come through well and it has not been a big test of the banks.”
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