MNI INTERVIEW: Norway LTV Caps In Focus As House Prices Fall

Arguments against Norway’s system of loan-to-value caps on mortgage loans are gaining ground in the country’s official circles , a co-author of a Norges Bank paper on the subject told MNI, adding that claims the rules will smooth the effects on consumption as house prices begin to decline are weak.

Regulations such as the 85% loan-to-value limit in force on purchases of primary homes in Norway were last tightened when markets were rising, but Norwegian house prices fell 0.9% in the fourth quarter from the third, even if they held up far better than in neighbouring Sweden. While LTV caps are useful in preventing households from borrowing beyond their means, they force them to make bigger initial downpayments, meaning that the net effect of the regulation does little to maintain capacity to consume through difficult stages of the housing cycle, said Ella Getz Wold, an assistant professor at The BI Norwegian School. (See MNI NORGES WATCH: Norges Holds, Points To 25bps Hike In March)

When the Financial Supervisory Authority recently suggested tightening caps via mortgage regulation, the Ministry of Finance decided against it, she noted.

“In the public hearing, many parties mentioned the concerning liquidity effect, so it seems to be gaining attention,” said Getz Wold, whose research has focused on how tightening LTV-caps has different effects depending on whether they are applied to first or second homes.

SECOND HOMES

Until the turn of the year, Oslo had an LTV-cap of 60% for secondary housing, but the authorities allowed this to expire.

“There are many motivations for implementing LTV-caps, and we have focused on consumption stability …Leverage is crucial for understanding how household consumption reacts to a fall in house prices. If leverage is very low, the consumption response is small, whereas if leverage is very high, the consumption response is large,” Getz Wold said, in emailed responses to questions.

"I think the quantitative conclusion with respect to the relative size of the beneficial leverage effect versus the detrimental liquidity effect does depend on the macroeconomic environment and institutional details."

LTV restrictions in place may help protect bank balance sheets against borrower default but Getz Wold said that diverse goals for the rules makes it harder to evaluate their usefulness.

"It is important to be precise in exactly what we want LTV-caps to achieve. If not, evaluating them becomes an almost impossible exercise,” she said.