But when interest rates soared from 1980 onwards, the payments to service this debt began to cripple the economy. At the same time, the projects these investments went into failed to deliver the expected returns. It all ended in a severe debt crisis that set back Latin America by at least a decade. Essentially, a mispricing of capital resulted in cheap funding and overinvestment. 11. Developed economies are equally prone to the risks of mispriced capital. The subprime mortgage crisis, which precipitated the global financial crisis less than three years ago, is another example of mispriced capital leading to excessive risk taking and leverage. Low interest rates in the US fuelled both a housing and a credit bubble that eventually burst, dragging down investors and intermediaries alike. 12. In emerging Asia, today, high levels of domestic savings coupled with large capital inflows pose the risk of unproductive investments and asset bubbles. When capital inflows slow down, as they inevitably must, the consequent unwinding will be rapid and possibly unpleasant. Asian policymakers have been responding to the situation in various ways 13. First, they have allowed the price of capital to rise – either through exchange rates or interest rates or both. Second, they have regulated the demand for capital through fiscal tools, such as transaction taxes and stamp duties. Third, they have regulated the supply of capital through administrative tools, ranging from restrictions on bank lending to selective capital controls. 14. The most effective way is to price capital correctly.
Mortgage companies should therefore take housing market fluctuations into account when issuing covered bonds. Conclusion I think it is fair to say that housing finance in Norway is in its infancy. There is a large proportion of adjustable-rate loans. Fixed-rate loans offered in Norway are less customerfriendly than, for example, in Denmark, where it is less expensive to cancel a fixed-rate mortgage and where there is a secondary market, providing risk diversification. Mortgage companies have a limited role in housing finance. Loan-to-value ratios are in some cases alarmingly high. And last, but not least, banks finance their housing loans by means of shortterm asset swaps in foreign markets. This is not a sustainable solution. I hope that this forum can contribute towards the development of a better foundation for housing finance in Norway. 1  See Van den Noord, Paul (2005): “Tax Incentives and House Price Volatility in the Euro Area: Theory and Evidence”, Économie Internationale 101, pp.29–45. This paper shows that house price volatility is higher in countries where tax regimes favour owner-occupied housing. See also IMF (2004): World Economic Outlook, September, p.81, where house price volatility is higher is countries where adjustable-rate mortgages are common. BIS Review 8/2010  3  4  BIS Review 8/2010  BIS Review 8/2010  5  6  BIS Review 8/2010  BIS Review 8/2010  7  8  BIS Review 8/2010  BIS Review 8/2010  9  10  BIS Review 8/2010  BIS Review 8/2010  11