Many countries in Europe saw an increase in debt levels before the financial crisis, but it has since fallen because households paid down debt. Norway and Sweden now stand as the only countries where this did not happen. This means that Norway is one of the few countries where debt has increased after the financial crisis. The reality is that Norwegians’ debt is growing faster than before. In one year, debt increased by 5.8 per cent. Statistics from Statistics Norway (Statistics Norway) showed that the public’s gross domestic debt was $ 4 714 billion at the end of March, an increase of 5.8 per cent over one year, according to NRK.
Debt increases every month
Debt growth was higher again in May compared to the previous month. At the end of May, the public’s gross domestic debt totaled $ 4 767 billion. The 12-month increase was then up to 5.9 per cent and marked the biggest increase so far this year. Statistics Norway’s figures were presented by Pord24/7, which also wrote about the Financial Supervisory Authority’s report “Financial Outlook 2015” where the conclusion was that we borrow too much and work too little. The report found that the level of debt in Norway is high in relation to value creation, and it has never been higher than today. Mord Walters, director of the Financial Supervisory Authority, explains that growth in house prices and household debt is primarily demand driven. At the same time, it seems that low interest rates and easy access to credit can help sustain the strong growth in debt and house prices. This will further increase household debt burden and help keep demand for goods and services up. Such a development is not sustainable, stresses Baltersen, saying there is a risk of a subsequent severe setback and financial instability.
High house prices
In the last year, until April this year, Norwegian house prices have risen by 7.9 per cent. Afterposten has obtained the figures from Eiram Bords, and writes that house prices measured against annual salaries have not been higher at 80 years, according to Kjersti Haugland, an analyst at DNB Markets. This contributes to the increase in the debt of the Norwegians in recent years. It is especially the youngest ones with the most positive hopes for income growth that take up the most loans, but middle-aged people also contribute to the statistics by raising loans either to increase consumption or help young people into the housing market. Figures from the Ministry of Finance confirm that household debt is historically high. In 1978, Norwegians on average borrowed only slightly more than their annual disposable income. In 2014, the debt burden was 224 percent of disposable income, writes Afterposten.
An evil circle
It is not only the strong rise in house prices and debt that paints a bleak picture of the Norwegian economy. Oil prices have fallen significantly over the past year, economic growth has stagnated and unemployment has risen slightly. Several analysts also believe that unemployment will increase more than today’s 4.1 percent over the next few years. The large debt burden makes consumers and the economy more vulnerable. If interest rates or unemployment increase, most people will have less to do in the private economy and this will have negative effects. Haugland points out that this can cause a vicious circle in that people have to tighten consumption because of the high debt, to Afterposten. When people spend less money, businesses are hit and in the worst case, have to resign more jobs. Chief economist Harald Magnus Andreassen of Swedbank points out that history has shown that if debt increases a lot, there is a great risk that something will go wrong in the economy.
Strategy for change
Haugland goes on to say to Afterposten that there is no indication that interest rates will go up first. As we read about in the previous article Interest rate cut in anticipation, Norges Bank has instead warned that another cut, from today’s 1 per cent, may already come in the fall. Although it is predicted that house prices will level off in late summer and fall slightly after that, the government has developed a housing strategy that will take measures to increase housing supply and curb lending growth. The housing strategy is a collaboration between the Ministry of Finance, the Justice, the Child and Gender Equality and the Ministry of Local Government. Finance Minister Jive Johnson told NTB that it must be cheaper and easier to build new housing. They will therefore make the regulations clear and predictable. The Financial Supervisory Authority has also proposed measures to inhibit the growth of debt for home buyers. In addition to equity of 15%, anyone who has loans that exceed 60% of the value of the home must pay installments. In addition, banks will test that customers can afford to service the loan even if interest rates increase by 6 percentage points, according to Afterposten.