Household debt is the total amount of money that households owe to financial institutions, such as banks, mortgage lenders, or credit card companies. Household debt can affect Norway’s economy and financial stability in several ways, depending on the level, growth, and composition of the debt, as well as the economic and financial conditions.
High household debt levels and high property prices pose significant risk to Norway’s financial stability, the country’s bank regulator said in a report on Tuesday. The regulator warned that many households have a very high debt burden and limited financial buffers, which makes them vulnerable to shocks such as a fall in income, a rise in interest rates, or a decline in house prices.
High debt increases the risk of a tightening of household consumption in response to a substantial fall in housing prices and a pronounced rise in the interest level, Norges Bank’s Deputy Governor Jon Nicolaisen said in a report. This could in turn lead to increased corporate losses for banks.
Measuring Of Debt Burden Of Norway
The debt burden, measured by the ratio of debt to disposable income, has reached a historically high level and is higher than in the majority of other countries. The growth in household debt has gradually abated and is now roughly in line with the increase in households’ disposable income, the Financial Supervisory Authority (FSA) wrote3. However, the FSA also noted that if the level of interest remains low, there is a risk that vulnerabilities will build up in households and firms in the coming years3.
Norwegians’ desire to own their own homes means that especially first-time buyers get off to a rocky start with high household debt levels. Seniors also have a rising degree of debt. The annual figures released by the regulators now show total debt as a portion of gross annual income at 342 percent
Forecast Of Norway Household debt
The forecast of Norway about the subject of household debt and its effects on the economy is not very optimistic. Some of the main points are:
The Norwegian central bank, Norges Bank, has raised its key policy rate four times since September 2021, from 0% to 1%, and expects to hike it further to 2.25% by the end of 20231. The bank said that the need for higher interest rates in Norway reflects the strong recovery in the Norwegian economy after the pandemic, as well as the risk of a build-up of financial imbalances due to high household debt and high property prices.
The average interest rate on residential mortgage loans, which is now about 2.2%, may then increase to around 4.3% by the end of 20231. This will have a significant impact on the debt servicing capacity and consumption of Norwegian households, especially those with high debt-to-income ratios2.
A report by Nordea, a Nordic financial services group, showed how three hypothetical families with different debt levels would be affected by rising interest rates. All three families will experience a decline in purchasing power from January 2022 to January 2023 – but the higher the debt, the steeper the decline. The purchasing power of the family with no debt will weaken by some 2%, while the family with a debt-to-income ratio of 5 will experience a steep decline of 8%2.
The OECD data showed that Norway’s household debt-to-income ratio was 210.38% in 2022, the highest among the OECD countries and well above the OECD average of 137.6%34. The data also showed that Norway’s household debt-to-GDP ratio was 119.9% in 2020, the fourth highest among the OECD countries and above the OECD average of 93.7%4.
The Norwegian Financial Supervisory Authority (FSA) warned that high household debt levels and high property prices pose significant risk to Norway’s financial stability, and urged banks to tighten their lending standards and increase their capital buffers4. The FSA also noted that if the level of interest remains low, there is a risk that vulnerabilities will build up in households and firms in the coming years4.
In summary, Norway’s forecast about the subject of household debt is that it poses a serious challenge to the country’s economic and financial stability, and that higher interest rates are necessary to prevent the risk of a hard landing. However, higher interest rates will also reduce the purchasing power and consumption of Norwegian households, especially those with high debt levels, and may have negative spillover effects on other sectors of the economy.
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