Skid marks have appeared in the rate of growth of Norwegian house prices, which has averaged 5.9% since 2005. Eiendomsverdi data to October indicate the rally is over. Nominal, unadjusted prices fell nationwide by an average of 1.9% after falling 2.2% in September. And compared to a year ago, September home sales fell 8.2%.

“The trend reversal in both house prices and property sales is reinforcing the end-of-rally thesis,” said Mathias Pleissner, deputy head of covered bonds. “The rising stock of unsold properties is unlike earlier vintages, where home sales following the sluggish summer period either rose or stagnated.”

Price index for existing dwellings, seasonally adjusted

Sources: Scope Ratings, Eurostat

On affordability, high house prices have pushed Norway’s debt-to-income ratio to 240%, the second highest on an international peer comparison basis and only slightly below Denmark. However, unlike in Denmark, Norway’s ratio has risen steadily in the last 26 years, with only a small decline in 2021.

One of the principal reasons Norwegians have a high DTI ratio stems directly from the country’s high rate of owner occupancy, paired with tax incentives: 81% of Norwegians are property owners and 62% have mortgages, the highest share in Europe. The high correlation between property ownership and mortgages is to some extent incentive-driven in the form of generous tax deductibility on interest payments. Based on 2020 data, 9.4% of Norwegian households have housing costs accounting for 40% of income. That is above the average EU housing “cost over-burden” rate of 7.8 %.

Housing costs will significantly increase in Norway, however, considering that 94.7% of home mortgages are floating-rate. The Norwegian reference rate (Nibor) was around 0.5% for most of 2020 but it now stands at around 3.4%, following the latest policy rate increase to 2.5% on 2 November 2022. A further increase is indicated for December. “For many of the loans originated in the last few years, the mandatory 5% rate increase to be tested by Norwegian lenders at origination provides only a moderate distance to the actual rate environment. The affordability cushion above that level is uncertain,” Pleissner said.

Accelerated increases in house prices have had a generally positive impact on banks’ mortgage books in recent years as they have pushed up the proportion of low-LTV loans extended by Norwegian covered bond issuers by 20pp. The share of loans with LTVs below 60% was around 55% in 2020. Today, it is 75%. This provides a strong cushion against declines in values.

“We do not expect the fall in house valuations to have a negative impact on recovery rates used in our covered bond risk analysis. The collateral cushion for Norwegian covered bonds is strong and able to absorb high price declines before any losses are crystallised,” Pleissner said.

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