Biggest Bank in Norway Dismisses Hard Landing in Real Estate Bet

Biggest Bank in Norway Dismisses Hard Landing in Real Estate Bet

DNB ASA (DNB) says predictions of a hard landing in Norway’s property market are unfounded as the nation’s biggest bank sees scope for house prices to rise next year. “We don’t expect any sharp decrease in house prices but actually believe there might be a very limited price increase and potential upside for 2014 and stable prices in the year or two after that,” Chief Executive Officer Rune Bjerke said in a Nov. 29 interview at DNB’s headquarters in Oslo.Since Nobel Laureate Robert J. Shiller pronounced Norway’s housing market as being in the grip of a bubble back in 2012, speculation has centered on when prices will peak and how much they’ll drop. Nordea Bank AB (NDA), Scandinavia’s biggest lender, predicted last month property prices in Norway will slump as much as 20 percent over the next two years.

Yet Western Europe’s biggest oil and gas producer will avoid a housing market shock thanks to its low unemployment, low interest rates and population growth, Bjerke said.

Norway, which is backed by an $800 billion sovereign wealth fund, has managed to withstand the worst of Europe’s debt crisis. Though economic growth has slowed, a report last week showed registered unemployment was 2.6 percent in November, helping ensure Norwegians can afford to keep up their mortgage payments.

The central bank sees mainland gross domestic product, which excludes oil and gas production, expanding 1.75 percent this year and 2.25 percent next year. In 2012, GDP by that measure grew 3.4 percent.

Sudden Slump

Even though growth is slowing, there are no signs pointing to a sudden slump in housing prices that would jolt Scandinavia’s richest economy, Bjerke said.

“The likelihood for a hard landing is very, very limited,” he said. “While you can never exclude a shift, it’s hard to see the reasoning behind any hard landing right now.”

The comments follow recent declines in Norway’s house market and prices have fallen even faster than the central bank predicted amid evidence that regulatory measures, including loan caps and higher capital levels, are working. DNB and other banks have also raised mortgage rates this year to help pay for higher capital requirements.

Households in Norway owe about twice their disposable incomes to creditors, a record level that the central bank and the financial regulator have warned is unsustainable. Housing prices fell a seasonally adjusted 1.5 percent in October from September, dropping for a second month, according to the Norwegian Real Estate Agents Association.

Government Talks

Norway’s new government is now considering easing loan standards amid concern that regulatory controls may hit the housing market at the wrong point in its cycle. The Conservative-led coalition, which won power in September, is looking into raising the amount banks can lend to borrowers to 90 percent of a property’s value from 85 percent.

Bjerke said debating loan-to-value caps won’t help.

“The key question is whether the banks are allowed to use their judgment and to open up for flexibility when it comes to how they actually treat applications,” he said. “It might be a mistake to approve a loan with equity at 15 percent but it might be a very solid and good credit in another situation with equity down to 10 percent or lower.”

Policy makers in Norway, like their counterparts in neighboring Sweden, have introduced some of the world’s strictest capital rules, in part to guard against property bubbles. Still, there remain too many regulatory differences between Scandinavia’s two biggest economies, making it hard to run a pan-regional bank, Bjerke said.

Comparable Rules

Finance Minister Siv Jensen has pledged to look into doing more to harmonizing rules between the two countries.

“We have been listening to promising signals and initiatives taken by the new minister of finance and we are very eager to see what can come out of that position,” Bjerke said. “We hope that there will be more comparable, transparent and equal rules across the borders because the financial markets are more or less integrated.”

DNB said last month it plans to keep increasing capital to reach a ratio of as much as 14 percent of risk-weighted assets by 2016 by retaining profits, limiting dividends and cutting costs. The bank will keep its dividend payout ratio at about 25 percent “during the capital build-up phase until 2016” while keeping a long-term policy of 50 percent, it said.

DNB’s Vision

DNB, which also operates in Sweden, in 2010 abandoned plans to become a full retail bank. It’s now targeting expansion in corporate finance to take on Sweden’s biggest banks — Nordea, Svenska Handelsbanken AB (SHBA), Swedbank AB (SWEDA) and SEB AB, Bjerke said.

DNB wants to grow in debt capital markets and risk products as well as advisory services in Sweden, using both its offices in Stockholm and Oslo, he said. The focus will be on energy, technology and telecommunications and media and manufacturing companies, including in the Oeresund region and the industry cluster in Gothenburg on Sweden’s west coast.

“We have an investment bank ambition in Sweden and aim to become one of the preferred banks for corporates,” Bjerke said. “We’re planning for growth and are pretty ambitious.”

To contact the reporters on this story: Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net; Stephen Treloar in Oslo at streloar1@bloomberg.net