Dyrtiden is the death knell for the lending regulations

Through the boom times and increased interest rates, there have been major movements in the housing market:

New home sales have plunged to historically low levels.
Rental property prices have shot up for the first time in ten years.
Debt growth has fallen to the lowest since the 1990s.
House price growth, measured as real house prices, has leveled off.

These trends indicate that imbalances in the housing market lie ahead.

We will have low housing investment and low housing construction in the future, because it takes 2-3 years from the sale of a new home until it is fully built.

At the same time, the need for housing is large due to population growth, centralization and, in some parts of the country, low housing construction over a long period of time. House prices, especially in pressured areas, will probably rise significantly in the coming years.

Rental housing prices will also continue to rise because increased tax pressure and increased interest rates make owning and investing in rental housing unprofitable. Fewer rental properties lead to increased rental prices and a tougher selection in the rental market. Wealth tax hits the poorest the hardest.

This illustrates that house prices are politics.

House prices are not only set by the market, but are also influenced by a wide range of political decisions by the government through various ministries, the Storting as legislator and allocator of money, Norges Bank’s monetary policy and the municipalities as market regulators through the planning and building case system.

Since 2015, Norway has practiced credit rationing through the lending regulations. One of the prerequisites for the regulation was low interest rates and strong debt growth.

The Norwegian Financial Supervisory Authority must by 23 August 2024 give the Ministry of Finance advice on the alignment of the lending regulations after 31 December 2024. The order is that the Norwegian Supervisory Authority must explain how the regulations have worked with higher interest rates, how the regional differentiation has worked and how larger and smaller banks, borrowers and others actors have adapted to the rules.

Finanstilsynet must also assess how the changes from 1 January 2023 have worked, and whether changes in other regulations affect the need for regulation of lending practices.
We expect the evaluation this time to be of a higher quality than the inspectorate’s previous evaluations, and that it is in line with the Directorate for Financial Management’s requirements for policy evaluations and the knowledge base for policy design.

Previous evaluations have had very low quality and selective use of sources.

In the latest issue of Samfunnsøkonomen no. 2 2024, researchers Fjære-Lindkjenn, Aastveit, Karlman, Kinnerud, Juelsrud and Wold have reviewed the research literature, which should be an example for the Financial Supervisory Authority to follow, both in form and conclusion. They conclude that:

“The lending regulation can be said to have worked as intended in that it has to some extent contributed to reducing household debt and house price growth. The aggregate effect on household debt growth is nevertheless limited, and the effect on house price growth appears to have been short-lived. It is more uncertain whether the regulation has contributed to reducing households’ vulnerability to negative shocks. This is because, although affected households are less indebted, they also have less liquid funds available. A direct consequence of the regulation is precisely that housing wealth can be used to a lesser extent as a buffer against shocks, as it cannot be mortgaged so easily. When it comes to reducing the risk of negative effects of loan losses in the banks, other instruments, such as capital buffer requirements, are probably better suited.”

This is in line with what Eiendom Norge has claimed for years.

The regulation’s costs and lack of target achievement mean that it should not be continued from the new year. So do other factors, respectively:

The new financial agreement, where the banks no longer have a duty to advise, but a duty to refuse. This makes both the individual and systemic risk of unreasonable lending significantly lower than before.

High inflation and wage growth in combination with low debt growth also results in a decline in real debt, which in turn results in a lower risk of financial instability.

In addition, the lending regulations have not been adjusted precisely for inflation, which makes the real repayment of loans higher and faster than before inflation took off.

In sum, this means that credit rationing must now be abolished.