Proposals of stricter regulations to curb Norway's house price growth

The Financial Supervisory Authority of Norway, Finanstilsynet, today published its proposals to the Ministry of Finance to slow growth in house prices.

The proposal to regulation represents a tightening of current requirements, and reduces the Norges Banks' room for discretionary assessments.

Finanstilsynet is proposing to make the current standards in the residential mortgage lending guidelines into a regulation that would be mandatory to comply. This will limit the banks' ability to exercise discretion, and this is according to Finanstilsynet the most important factor to a tightening of the lending practise.

Finanstilsynet also proposes some tightening of the existing guidelines. They recommend a 2,5% amortization per year for mortgages where the loan-to-value is higher than 65%. In the current guidelines the norm is to require amortization, but without being quantified, for all loans with loan-to-value above 70%. In addition the increase in interest rates that are used when stress testing the borrower's debt servicing ability is increased from 5 to 6 percentage points.

The requirement of 15% equity (85% loan-to-value) is kept unchanged and there is still possible to increase borrowing above the 85% loan-to-value rule as long as it is secured in other property.

Finanstilsynet ends its response to the Ministry of Finance by saying that "regulation of mortgage lending practices by means of regulations,.., is an intrusive measure and should not be a permanent policy instrument". When the market conditions changes Finanstilsynet emphasizes that regulations should be adjusted or removed.

If the proposals are approved in the Ministry of Finance, we think they have the potential to slow house price growth to some extent. The proposals will also make it easier for Norges Bank to neglect financial stability considerations when setting the interest rate.