What influences developments in the housing market? Norges Bank’s calculations show that high wage income has pushed up house prices. The contribution from interest rate changes has also been high in the past two years but has diminished somewhat recently. Interest rate changes have a strong and rapid impact. From 2004, housing starts were substantially as a result of high house prices, low interest rates and a favourable economic outlook. In Oslo in particular, housing starts have been high. A higher supply of dwellings will reduce pressures in the housing market. 4/6  When we increase the interest rate, we expect house prices to rise at a slower pace. Norges Bank increased the interest rate by ¼ percentage point last summer. Before this increase, banks’ mortgage rates fell, even though Norges Bank’s sight deposit rate remained unchanged. Stiff competition for mortgage loans and lower capital requirements for mortgage loans when the Basel II Accord comes into force may have contributed to this. In recent years, nominal long-term interest rates have fallen more than inflation. The real interest rate has declined. This may not only be an expression of economic conditions, but may also reflect a lower normal level for real interest rates. A lower normal real interest rate level will result in higher equilibrium prices for all capital goods, including houses, because the present value of future returns increases.
Long periods of strong growth in debt, asset prices and investment may be a source of subsequent instability and problems in the financial system. We have observed this phenomenon both in Norway and in other countries. When optimism turns to pessimism, the financial system can come under pressure. However, it is not possible to determine with any certainty the value of debt, asset prices and investment that may constitute an unacceptable risk in this context. The pace of growth in household borrowing cannot be sustained over time. It would probably be wise for both borrowers and lenders to acknowledge that the root of subsequent problems, and demanding corrections, is often to be found during such periods. Thank you for your attention. 6/6