Fitch: Norway mortgage rules to slow, not reverse, house prices


Further tightening of mortgage lending restrictions by the Norwegian authorities will be among the factors that will slow the rate of residential property price growth in 2017, Fitch Ratings says. However, low rates and steady demand will outweigh the impact of regulatory intervention. We forecast residential property prices to rise a further 6% this year, half the increase for 2016, but believe that recent rates of increase are unsustainable in the long run.

From January 1, mortgages with a loan/value (LTV) above 60% must be amortising, compared with 70% previously. The maximum LTV for home equity credit lines has also been lowered to 60% from 70%. In addition, banks cannot extend mortgage loans to customers whose total debt exceeds five times their gross income. The measures, which were originally proposed in September by Norway’s Financial Supervisory Authority (FSA), are scheduled to last until June 30, 2018.

The FSA’s other proposal to make mortgage lending regulations less flexible was not adopted and banks can still make some loans that do not meet LTV and debt-service restrictions. However, the ‘speed limit’ for these loans has been lowered to 8% of quarterly lending for Oslo and 10% in the rest of the country. This is most likely to affect first-time buyers, who tend to be granted most loans above the regulatory thresholds. The LTV requirement for second homes in Oslo has been cut to 60% from 85%.

Norway has already taken steps to cool its housing market. Alongside the introduction of LTV caps in 2015, Norwegian banks are subject to risk-weight floors on mortgage lending (via a 20% minimum loss given default), and a countercyclical buffer of 1.5%, which will increase to 2% in January 2018.

Continued regulatory intervention highlights the banking sector’s robust macro-prudential framework. Nevertheless, earlier interventions have not stopped property prices (up 12% in 2016, mainly driven by Oslo and its environs) and credit to households rising. The ratio of household debt to income is about 215% and Norway’s score on Fitch’s Macro-Prudential Indicator moved to ‘2’ from ‘1’ last year as the rise in credit/GDP moved more than 5pp above trend. In September, the FSA and Norges Bank said that existing measures were having a “limited effect.”

Low rates (the Norges Bank cut its key policy rate to 0.50% in March 2016), strong credit availability, low unemployment and a relative shortage of housing, especially in and around Oslo, will continue to support property prices in 2017. National price rises will continue to mask regional variations, with prices in the oil-intensive region of Rogaland having fallen in 2015 and 2016.

Our 6% forecast is half the rate of last year, but is still high by global standards. It incorporates tighter lending criteria, a potential slowdown in credit growth due to the cap on lending to highly indebted borrowers and a slight increase in mortgage rates from the record lows observed in 2016.

Low rates will keep affordability strong in 2017, but Norwegian property prices have risen substantially more than income for several years. This means that recent rates of price growth are not sustainable in the long run. Although higher mortgage rates could trigger a correction, we think any increase in mortgage rates will be moderate as the policy rate is expected to remain at current levels for the coming two years.

Source: Fitch Ratings

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