Sunday, February 2, 2014

High Loan-To-Value Mortgages And The Real Concern For The Norwegian Youth

During the last week or two I have participated in a debate over the Norwegian financial authorities' limit on high loan-to-value mortgages dating back to 2012. The limit is not absolute, but it pushes banks in most cases to require that the buyer of the property finances 15 % of the purchase with equity. In other words, it limits the mortgage to 85 % of property value. This is known as "egenkapitalkrav på 15 %" in Norwegian.

(For further information on reasons behind this kind of limit, I suggest you read this Bloomberg article by Peter Orszag. He looks at the newly imposed limit in New Zealand, but mentions also that Canada, Israel, Singapore and Sweden among others have similar limits.)

The public opinion in Norway until late has been strongly against the raised limit. Catering to this opinion helped the newly elected government to win the elections; the parties campaigned on reducing the limit back to 90 %/10 % were it stood earlier (although it was less strictly enforced back then, and 100 % loan-to-value mortgages weren't unheard of). For sure, this is a controversial tool, but then again, there are no perfect tools. In the end, the limit is criticized exactly because it achieves the goals it was meant to achieve. You need to evaluate the pros and cons of it to form an opinion on it. I'll start by presenting the cons taken up by the dominating side, before I move to the pros, and most importantly, the underlying reasons behind raising the limit.

Norway has a relatively egalitarian society, reflecting the strength of the Nordic social-democratic movement. People are for equal opportunity. Equal opportunity can be defined in many ways, and in Norway it clearly includes the opportunity to buy a home given that you have an income that can serve the loan. What creates inequality (klasseskille) is leaving people with less (inherited) resources on the rental market, where they pay for their housing a lot more than the homeowners do (not least thanks to the heavy tax benefits enjoyed by mortgage-holders). Add the enormous house price appreciation witnessed in Norway, and you get a feeling that the rich get richer and the poor get poorer, and it's hard to deny that it hasn't been the case during the last 20 years.

The main* argument against the 85 % limit is thus that it creates inequality by leaving the ones without large savings and/or financial help from parents on the rental market. And people here genuinely -- and somewhat understandably, when we take into account the recent history -- believe that one is always better off owning. The conclusion from this is that young people should be helped to "enter the market" as early as possible, so that they don't "waste" their money by renting.

The intentions behind the policy of high homeownership, especially among the less well-off, are no doubt good. But good intentions don't always lead to good outcomes. This policy was taken to one kind of extreme in the U.S. in early 2000, where it was one of the reasons behind the subprime crisis that started in 2007. The pursuit of high homeownership has been taken to an extreme in Norway too, although we shouldn't draw too many parallels between these two countries. Whereas in the U.S. it was the means that became extreme (subprime/NINJA loans), in Norway it has been the level of achievement that is in my opinion extreme.

Homeownership in Norway has achieved what one could almost describe as cult-/religion -like status, and the homeownership ratio stands at over 80 %. In the age group 30-34 year-olds, 74 % own their own home, in the group 25-29 year-olds 52 %, and even in the group 20-24 year-olds whole 19 % are homeowners (source: NIBR). These are mind-blowing numbers, many times higher than in most of the other developed countries. And compared to inhabitants of the other rich nations, Norwegians privately own relatively little financial assets like stocks and bonds. Most of their wealth is tied to the property market. For an outsider this might sound like a sign of a bubble, but for Norwegians the central role of the housing market is rather something to be proud of (this might explain why prime minister Solberg used the concentration of wealth on the housing market as an argument against a bubble, like I told earlier).

The real concern for the Norwegian youth

As I have stated on earlier occasions, I'm concerned for the Norwegian youth. It's clear that there is a risk related to taking a mortgage with a high loan-to-value ratio. The house prices do fall, and sometimes significantly.

According to the latest review of banks' lending practises from fall 2013 (see Finanstilsynet, in Norwegian), the loan-to-value ratio exceeds 85 % in 35 % of mortgages to under 35 year-olds. In 12 % of the youth's mortgages the loan-to-value ratio exceeds 100 %.

These are young people who have the most productive decades of their life right in front of them. According to NIBR, 52 % of 20-34 year-olds are homeowners. Of these, according to Finanstilsynet, 35 % have mortgages where the loan-to-value ratio exceeds 85 %. This is where in my opinion the biggest risk to Norwegian economy lies. Many of these young people have seen no alternative to owning. And the state and the banks have taken care that an internationally disproportionate share of them get to own -- by providing them with easy credit.

I'm not the only one who is worried that the young people who have been helped to the market might end up getting hurt. The 85 % limit is there because Norwegian and international financial authorities, among others, directly or indirectly (through bubble concern) share my concern for the Norwegian youth. This includes Norges Bank, Finanstilsynet, Ministry of Finance, IMF, OECD, and so far three Nobel laureates in economics. (Some evidence here, here** and for example here.) Do these authorities, or I, know for sure that the house prices will fall significantly? No. But we know that the risk of this happening is real. We know that no one should state that they help the young people by providing them with easy credit, so that they can buy property that according to many indicators is already overvalued.

So here are the two sides to this debate (somewhat tongue-in-cheek, if you allow):

Team A: "We're helping the young people by calling for easier access to credit"


Mostly homebuilders and real-estate agents (!) since the house prices started to fall.

Team B: "We're helping the young people and the Norwegian economy by restricting access to credit"


Norges Bank
Yours truly

It's time for you to choose your side.


* Some people more understandably oppose the limit on the grounds of negative consequences of government intervention in the markets. It's another story, but I think you don't want to start here if you want to free the markets from government intervention. A free market is not reality, and banks don't need to behave like they would behave in a free market. Instead, they have very strong (perhaps short-term, but nevertheless) incentives to lend out more freely than is healthy for the economy.

** This is a very important article in that it reveals what the government really thinks about the housing market. I think we can thank the new finance minister Jensen for saying out loud something that she and the prime minister Solberg since have tried to downplay in public; there is a real concern for the housing market. This perhaps also explains why the government didn't even try to keep it's promise to take the limit back to 90 %/10 %.


  1. I thought it was me! this is the most interesting commentary (for an English speaker) I have seen on the topic of the Norwegian economy. I followed my partner to Oslo in 2012 but abandoned the effort after a year due, in significant part, to my frustrations with the state of the economy. I also suffered constant nausea from Norwegian's telling me that "debt is good".

    A few points, on which it would be great to hear your thoughts;
    1. Wealth tax. How on earth can the Norwegian's, with already ridiculous personal debt levels, have a system that punishes people who save rather than spend?
    2. Tax deductions on debt? am I the idiot here? surely this just distorts (inflates) asset prices. It also inhibits the ability of the central bank to raise interest rates because of the feared impact on asset prices.
    3. The egalitarian lie. If Norwegian society really believed in social democracy, it would do something to make first homes cheaper than investment properties. (I am aware that firm house prices are needed to induce supply but homes are now beyond the affordability of many, whilst others maintain portfolios of property).

    Norway is a beautiful place but I fear that its inherited wealth will be used to continuously paper over the cracks in it's macroeconomic lunacy.

    1. Norway's striving towards equality has led to some very odd policy decisions: debt is seen as sign of poverty, and so deserves pity in the form of tax relief - even if it is for an enormous house (up to 50% of which may be let out for tax-free income). Having money in the bank instead is seen as a a sign of having 'too much' money, and so is punished with the wealth tax. It has no effect on equality. It's a just a strangely pious expression of a distaste for cash.

    2. Thank you, Simple Economist!

      Great to hear that this makes sense to you.

      I'm not an expert on Norwegian tax system, or it's history, so these are just general comments. I hope we could hear from some Norwegian readers on this!

      1. I understand that there's a change coming to this. At least Erna Solberg has said that they want to make it more profitable to save. (A pro-cyclical move if the economy is weakening already..... Late, as always.)

      2. This, and perhaps also point 1, are generally things that governments the world over use when things go downhill and they want to stimulate spending and credit growth. And what was supposed to be only a short-term, counter-cyclical move, becomes the norm and is helping to blow the next bubble. And then you need new stimulation again... If one wanted to get rid of these tax perks, one should have done it already long time ago when the credit growth was high and hadn't turned yet? Too late now, in my opinion.

      3. I think they do make it cheaper? You pay clearly more tax when you sell an investment property than your (first?) home? This is what investors today are saying: It doesn't make much sense to buy a house to let today, because the owner-occupiers, with the tax benefit, have taken the prices too high?

    3. Thanks Huple's Cat,
      The gov't addressing point 1. is encouraging and I agree would be good to get a Norwegian's economic perspective particularly on 2. In respect of 3. I clearly don't know enough about the specific taxes but in order to be fairer on the first time buyer, shouldn't the tax differential apply more when purchasing the house? (doesn't the current system of higher tax on investor sales just reduce the supply in the market (to the first time buyers)?).