Norwegian regulator proposes 15% deposit to cool property market
Fears of a runaway house price bubble has forced the Financial Supervisory Authority of Norway (Finanstilsynet) to announce proposals limiting access to funding by imposing a higher minimum loan to value ratio of 85%.
The proposal mean house buyers would be forced to find 15% of the property’s value from their own pockets, against the current 10% rule.
The Authority also announced a tightening of LTV on equity release, recommending it be dropped to 70% from the current 75%.
And it has urged banks to make assumptions of greater interest rate increases when assessing affordability for borrowers. It says banks should allow for an interest rate increase of up to 5% when assessing lending requests.
“In recent years household finances have been subject to rising debt burdens, high loan-to-value ratios on residential properties and greater use of interest-only mortgages, all of which heighten vulnerability in the event of an economic setback,” Finanstilsynet said.
“Household debt growth has largely shadowed the trend in house prices several years. Both indebtedness and house prices are now at a very high level. This outcome is largely driven by borrowers’ positive expectations with regard to their personal finances and their belief in a continued rise in house prices.”
Morten Baltzersen, director general, added: “It is worrying that debt has grown most among groups with the highest debt relative to income. An interest rate hike or loss of working income will have major consequences for these groups. The trend in house prices and household debt is key to financial stability. A more sober residential mortgage lending practice can help to dampen the risk posed by a subsequent economic setback.”
The proposals for the housing market follow recent statements from Norway’s central bank that it is minded to ease monetary policy in the face of a possible slowdown. However, this would risk increasing the risks in the housing market identified by Finanstilsynet. Oslo’s property market is seen as one of the strongest in the Nordic region so far this year. Local fiscal rules mean that domestic investors often put spare cash into additional residential property.
Meanwhile assets such as the Norwegian krone are in demand among international investors looking for alternative safe havens from the Swiss franc following the decision by the Swiss National Bank to peg the CHF against the euro. The gains in the NOK against key currencies such as the euro, and even against other Nordic currency such as SEK in the past 18 months means that returns from property redeemed in other currencies has been growing faster than the underlying asset appreciation in local currency terms.