Statistics Norway (SSB) publishes data on the overall structure of the housing stock in Norway. This shows that the majority of the Norwegian population live in one-family, detached houses, and if the semi-detached or terraced houses are included, that figure covers 73 per cent of the total residential housing stock. There are consequently relatively few flats or apartments in Norway, which are mainly located in inner-city centres. It is however the apartment segment which has the highest transaction volume with on average 55% of all real estate sale and purchases in Norway over the last five years being apartments. The main Norwegian residential housing real estate price index is weighted by transaction volume. Consequently, the selling prices of apartments influence the path of the index overproportionally.
SpareBank 1 Boligkreditt’s portfolio of residential units, on which the mortgages are secured, is shown alongside the entire Norwegian housing stock for comparison purposes in the chart below. For Spabol, the detached one-family houses make up a larger proportion of the portfolio with 59 per cent vs. 52 per cent for the country at large, while apartments make up a slightly smaller portion.
Housing stock for Norway and SpareBank 1 Boligkreditt
Oslo is the country’s capital and largest city with approximately 640,000 people living within the narrow geographical border of the municipality of Oslo. Due to space restrictions, the Oslo residential real estate market consists overwhelmingly of apartments, thus a large share of Norway’s apartment transactions also take place here.
Price appreciation in Oslo has been relatively strong compared to the rest of the country, and is in 2015 (as of the month of November) up 11 per cent on the average compared to the prices in 2014. The chart below illustrates the annual price appreciation for apartments in Oslo vs. the apartments in the country at large and also compare these developments to the detached house price index in Norway over the previous five years. It is clear from the chart that the detached segment has developed more moderately in price.
Annual average price change
For SpareBank 1 Boligkreditt, with less than 9 per cent of our portfolio of mortgages in Oslo and overall in Norway a larger representation of mortgages on detached houses, we can conclude that overall house valuations which form the basis for our mortgage lending has developed more moderately than what the price index for Norway as a whole indicates. The price index is influenced by a relatively active apartment transaction volume in the capital.
Most household own their dwellings in Norway. The overall share of the population over 16 years of age who lives in a house or apartment which is owned is 84 per cent, according to SSB. Over time there has been a slight increase in the share of home owners, which stood at 82 per cent in 1997. The highest proportion of owner occupier households is among the older members of the population (45 years and older), where about nine out of ten own their home. The most stable growth in owner occupier households, however, is among people aged 25-44, with an increase from 76 per cent in 1997 to 81 per cent in 2015. The increase in owner occupier households among people aged 25-44 has taken place during a period that has also seen a significant increase in housing prices. Couples, especially couples with children, are owners to a greater extent than others, especially when compared with people who are single and single parents. Ninety-eight per cent of couples with children aged 7-19 years are owner occupier households.
The consumer decision to buy vs. rent is influenced by a number of factors, including cultural ones, but is supported by the tax regime with very low or no real estate taxes, tax deductions of interest (27 per cent of interest paid) and a low valuation of real estate as part of the taxable basis for the Norwegian wealth taxation (currently at 0.8 per cent of taxpayer net assets). In addition, the availability of rented accommodation is not, due to a long history of high home ownership, equal to the availability of choice in the buy to own segment.
Because of the high home ownership rate, Norwegian households carry mortgage debt. The average debt is between 1.1 and 1.2 million kroner (122,000 to 133,000 Euros at 9 NOK per EUR), with a large degree of variability amongst households. Approximately 12.5 per cent of households are leveraged by more than 3 times gross income and approximately 5 per cent by more than 4 times their gross income. Even though the level of debt as a share of net disposable income for the entire population is around 200 per cent, the growth in debt outstanding has slowed down. Importantly, households are in a comfortable financial position due to that living expenses have not increased nearly as much as income over a number of years and that mortgage interest rates are low.
The chart below illustrates the point for a hypothetical average household with children. The mortgage size has been set at 85 per cent of the median house price in Norway as of September 2015 with a repayment horizon of 25 years and equal instalments . The cost of necessities have been sourced from the government agency which calculates a reference household budget for the country, and this SIFO budget includes the cost of food, clothing, transportation and other goods and services deemed necessities. New mortgages probably would attract a lower rate than the 3.2 per cent figure in the chart, which represent an average for 2015. We estimate that this household spends 24 per cent of net disposable income on average in 2015 for mortgage servicing, both interest and instalments. The trend is decreasing and it is now mainly the downward trajectory of interest rates which is responsible for this, a trend which we expect will continue in 2016.
However, due to the predominance of floating or variable rates with which Norwegian households establish their mortgages, a regulatory requirement is for banks to test how a borrower can withstand interest rate increases. Potential borrowers should be dissuaded from taking out the mortgage if there is not an ample income or financial cushion to be able to absorb a mortgage rate increase of 5 percentage points above the current offered rate.
1 The 85 per cent loan to value limitation is a regulation which applies to all banks in Norway and was established as such in 2015 after having existed in the form of a recommendation from the banking supervision authorities in prior years.