8. Fundamental Factor Analysis
8.2 Indirect Factors Affecting Demand
8.2.2 Bank’s Lending Policy
Thorstensen from NCB (2016) also states that Norwegian households have financial buffers greater than earlier, causing them to be better able to meet an increase in interest rate.
Summarized, we see a rather substantial growth in both supply and demand for credit. As mentioned, the house prices and credit growth mutually influence each other, making it hard to separate which of them having the greatest effect. Nonetheless, the historically high DTI-ratio and credit growth both increase the risk of bubble formation in the housing market. Both NCB and FSA have for a long time warned about the consequences of this development. If the development in the housing market turn or the interest rate increases, the risk of a significant fall in housing prices is present. This can cause negative ripple effects in the economy as households will have to reduce spending and consequently cause a lower demand in the economy. In turn, this can give increasing unemployment rates and lower income growth (Tekla, 2016).
The Norwegian households have one of the world’s highest debts to disposable income ratios, being above 200 percent the last decade. In comparison, the average DTI-ratio in the United States before the housing market crash in 2007 was 128 percent. On the other side, DNB, the largest bank in Norway, states that there are several factors contradicting bubble formations in Norway/Oslo. In Norway, a great fraction of households own their housing, as opposed to renting, naturally giving a higher debt-ratio. The high tax rate on income gives on one hand a lower disposable income compared to other countries, but on the other hand, the interest on loans is tax-deductible. In addition, the welfare society in Norway allows a higher tolerance for debt burden as unemployed seeking for a new job can claim unemployment benefits for 1-2 years based on their earned income the last calendar years (NAV, 2016b). In addition, compared to the United States, the increasing housing prices are mainly built on the basis of increased income of Norwegian households over time, and not only increased supply of credit as experienced in the US (Sparre, 2014).
income. As the development in housing prices and the households’ debt burden is of central importance to financial stability, it is essential to have strict lending policies. Hence, having a more restrained lending policy can help to reduce the risk of the households (Finanstilsynet, 2011).
In 2011, the FSA therefore tightened the guidelines for lending practices. These changes broadly contain requirements that banks conduct a more thorough credit assessment among borrowers when calculating the loan-to-value ratio (LTV) on mortgages and credit loans and restrictions on the LTV-level. Moreover, banks should consider a possible interest rate increase when calculating the borrower’s solvency and the size of the instalment payments (Finanstilsynet, 2011). The FSA has developed 10 “guidelines”, where the two most important are:
i. The mortgage loan should normally not exceed 85 percent of the property’s market value (previously 90 percent).
ii. In assessing the solvency of the borrower, the bank must take into account that the interest rate can increase by 5 percent from the current level.
The borrower’s capital requirement of 15 percent affects the total obtainable loan, as the borrower will receive less capital for a given amount of equity. The chief of FSA, Morten Baltzersen, claims that the new guidelines have lowered the amount of house buyers taking up high mortgage loans. On the other hand, the new guidelines have also been criticized for creating a higher threshold for entering the housing market and for establishing a class distinction between those who can get help from parents and those who cannot (Bjørnestad, 2012).
However, it is possible to get a mortgage loan even though one does not fulfill the requirements. The NSHB offers start-up loans for those that are struggling in the housing market, both in relation to buying a home or keeping one. In order to give more people the possibility to get a loan, NSHB assists borrowers with the capital that are required as equity by private banks. The loans are however only offered to people that fulfill certain requirements (Husbanken, 2016).
Further on, borrowers can also have a guarantor as security for the loan or establish additional collateral. A guarantor assures that the borrower can pay the instalments and rents. Additional collateral is typically pledged on others (often parents) housing or cottage. Studies have shown that the increased need for equity of 15 percent has increased borrowers needs for guarantors. TNS Gallup reports that one out of three has helped their children into the housing market either by being a guarantor or by providing additional collateral (Staavi, 2016).
Additionally, even though new guidelines are presented, not all banks have actually implemented them into their internal policies. Surveys after the new guidelines show that 17 percent of the loans had equity below the required 15 percent, thereby not fulfilling the requirement of an 85 percent LTV-ratio (Bjørnestad, 2012).
What Does this Mean for the House Prices?
The increased capital requirement can lead to fewer people being able to get loans, consequently reducing the demand for housing. The guidelines will possibly affect the younger segment the most as they might be the group that struggles most to obtain the required equity. The Head of Finance in Sparebank 1 SMN, Endre Jo Reite, states that among the younger segment in 2013, in approximately 42 percent of all loans, the borrower receives help from their parents, in comparison to 35 percent in 2011/2012 (Hammerstad, 2013). The lack of capital may eventually increase the demand for small housing as low-income households will demand cheaper housing. An increased demand for small housing can however push the prices up even further, causing a vicious circle for low-income households (cf. ch. 8.1.5).
Elisabeth Holvik, Chief Economist in Sparebank 1, believes that the banks’ restrictions on their lending practices will help to slow down the growth in housing prices. However, Holvik further states that since there exists sufficient capital in the society and historically low rates, the banking policies will probably only have a small effect on the housing market, at least as long as the population growth is high, the unemployment level low, disposable income high and interest rate continue to be low (Mikalsen, 2013).
Moreover, in 2015, FSA proposed new, even stricter lending rules. The main changes are that the borrower should manage a 6 percent increase in the interest rate, opposed to the previously 5 percent and, in addition, stricter rules not to exceed the 85 percent LTV-ratio. The proposed regulation constitutes a clear constriction on individual judgement made by the banks, which is the most important contribution to the tighter lending practices (Baltzersen, 2015). As of today, the new rules have yet to be approved and implemented. The FSA believes it is necessary to introduce such rules even though the weaker prospects of the Norwegian economy due to the drop in oil-prices, will likely contribute to a reduction in the willingness to borrow. There is however a risk that the prolonged low interest rate and the still relatively easy access to credit will cause strong growth in both debt and house prices. The FSA believes that such a development is not sustainable and will increase the possibility of a sharp downturn and financial instability, which is why they consider it necessary to introduce stricter lending regulations (Baltzersen, 2015).
Conclusively, it has become harder for households to be granted a loan for buying housing. However, as mentioned earlier, there are ways to go around the banks’ regulations, which lead us to believe that a bank’s
lending policies only will have a small effect on households’ possibility to obtain financing. According to a report by NCB there has been some reduction in the demand for loans among households. NCB states that it is difficult to say whether the reduction is due to the new lending regulations, or because of other factors in the economy (Knudsen, 2015).