The equity requirement determines how much of the home’s value one must provide themselves to obtain a mortgage. If you are purchasing a home valued at 3 million, with an equity requirement of 10 percent, you need to contribute 300,000 Norwegian kroner yourself.
The consequences of this measure are that it becomes easier to obtain a mortgage, but it may also meen higher prices.
– There is reason to believe that a lower equity requirement will provide a small, additional boost to housing prices. For a young couple looking to buy an apartment in a Norwegian city, this could mean thay need 150,000 to 200,000 kroner less in saved funds before they can purchase, says chief economist Kyrre M. Knudsen at Sparebank 1 Sør-Norge to NTB.
Macroeconomist Karoline Alsvik at Handelsbanken is even more explicit.
– This will primarily increase demand and thereby prices. We view this as a pure demand impulse. It offers increased borrowing opportunities for everyone, and then we are right back where we started in the bidding process, she writes to E24.
Norges Bank is in favor – The Financial Supervisory Authority is against
The goverment has simultaneously removed the expiration date for the mortgage regulation, which has until now needed to be renewed every other year.
– We are now lowering the equity requirement for mortgages from 15 to 10 percent. I am concerned that owning a home in Norway should be safe and good, and that as manny peopel as possible should have the opportunity to own their own home. This change may help more people enter the housing market,while continuing the regulation contributes to the security of the economy,says Finance Minister Trygve Slagsvold Vedum (Sp).
Norges Bank proposed lowering the equity requirement to 10 percent back in October. At the same time, both the Financial Supervisory Authority and the Consumer Council are very skeptical about making such a move.
The financial Supervisory Authority will not comment on the matter, other than that they will adhere to the new regulation.
– We have listened to the Financial Supervisory Authority and Norges Bank.It is significant to have stable and good framework conditions, and we believe we have now found a good balance between people’s need for loans to finance housing and the concern for financial stability. Therefore,we are removing the expiration date,says Slagsvold Vedum.
more people may choose fixed interest rates
Other measures being taken include changing the so-called interest rate stress test for fixed-rate loans, by allowing banks to consider that customers’ incomes and expenses grow during the period in which they lock in the interest rate. This opens up for further clarification later.
Additionally, the Ministry of Finance is now asking banks to take more individual considerations into account regarding, among other things, families with children, rather of assessing their incomes and expenses based on reference budgets.
– It is generally important to me that people have the opportunity to own their own homes, but I believe it is especially important that families with children have the opportunity to establish themselves in safe and good homes throughout the country, says the finance minister.
Knudsen at Sparebank 1 points out that changes to the stress test for fixed-rate loans may lead more people to choose such loans. In Norway, most have floating interest rates, which is unusual.
The banking and housing industries rejoice
The construction industry has had low activity for several years, and NHO Byggenæringen is pleased with the lowering of the equity requirement. Simultaneously, Managing Director Nina Solli is calling for more housing projects to be initiated.
The Norwegian Real Estate Association is also very pleased with the change, believing it will provide more families with children and people with ordinary incomes the opportunity to enter the housing market.
They envision that the change, together with expectations of lower interest rates in the near future, will lead to more homes being built.
Nordea’s country manager Randi Marjamaa believes it is positive that banks are given greater room for individual assessments.
How do equity requirements influence the ability of first-time homebuyers to enter the market?
Interview between Time.news Editor and Economist Kyrre M. Knudsen
Editor: Welcome, Kyrre. Thank you for joining us today. Let’s dive right into the topic of mortgages and equity requirements. Can you explain to our readers what the equity requirement is and how it impacts potential homeowners?
Knudsen: Thank you for having me. The equity requirement is essentially the proportion of a property’s value that a buyer must provide as a down payment to secure a mortgage. For example, if someone is looking at a home valued at 3 million kroner with a 10 percent equity requirement, they need to contribute 300,000 kroner of their own funds.
Editor: That sounds straightforward. However, what are the implications of lowering this equity requirement for both buyers and the housing market?
Knudsen: Lowering the equity requirement makes it easier for people, especially younger couples, to enter the housing market. They might need to save between 150,000 to 200,000 kroner less before they can purchase a home. This accessibility is notable, but it does come with a potential downside: it can drive up housing prices.
Editor: So, you’re suggesting that while it may help buyers, it could also inflate the market?
Knudsen: exactly. With more people able to afford mortgages, we may see increased competition for homes, leading to higher prices. This creates a cycle where the initial boost in housing accessibility can ultimately backfire by escalating the costs of homes further in the long run.
Editor: I see. Karoline Alsvik from Handelsbanken has mentioned that this could be a pure demand impulse. Can you elaborate on what she means by that?
Knudsen: What she refers to is that increased borrowing opportunities come from lower equity requirements, which stimulates demand in the housing market. When more buyers enter the market with heightened purchasing power, it can create bidding wars, thereby driving prices higher and negating the initial benefits of the policy.
Editor: so it seems like a double-edged sword. What are the implications for potential homeowners if prices continue to rise?
Knudsen: For many potential homeowners, especially young couples, rising prices can make home ownership increasingly elusive. The goal of making home buying more affordable could be undermined if prices rise faster than incomes or savings can keep up. Its a delicate balance that policymakers must consider.
Editor: It appears Norges bank is in favor of these measures. What are their thoughts on the relationship between equity requirements and overall economic health?
knudsen: Norges Bank recognizes that affordable housing is critical for economic stability and growth. However, they must tread carefully; while encouraging home ownership can be good for the economy, excessive price inflation can led to a housing bubble, which can be detrimental in the long term.
Editor: Kyrre,thank you for your insights.It seems the relationship between equity requirements, borrowing practices, and housing prices is complex and requires careful consideration by policymakers moving forward.
Knudsen: Absolutely. It’s a multifaceted issue that directly impacts individuals, families, and the broader economy. Thank you for having me.