Solid results in banks, but the household debt burden is increasing
"The short-term outlook for financial stability is regarded as satisfactory and somewhat better than half a year ago," said Governor Svein Gjedrem in connection with the presentation of Financial Stability 2/2005 on Tuesday, 6 December. The sharp rise in house prices and household debt, however, entail a risk of less stable economic developments in the longer term.
Banks achieved solid results in the first three quarters of 2005, primarily as a result of very low loan losses and lower costs. Banks' financial strength is solid.
The risk of a substantial increase in losses on loans to households in the short term is regarded as relatively low. However, household debt accumulation is still very high and the debt to income ratio is now higher than at the end of the 1980s. Even though households on the whole have built up their financial assets, only a small portion of financial assets are held by households with high debt burdens. House prices have risen substantially in recent years and the price level may now seem to be somewhat high in relation to developments in income, interest rates, unemployment and residential construction. Experience shows that developments in the housing market have considerable influence on growth in lending and that the effects are long-lasting. Growth in household debt may therefore remain high for several years, even if the rise in house prices should taper off. If so, the debt burden will then increase to a very high level. When the interest rate is gradually - in small, not too frequent steps - brought up towards a more normal level, however, the rise in house prices and debt is expected to edge down. This will reduce the risk of wide fluctuations in activity in the Norwegian economy and in banks' losses and results.
Enterprises' financial position is favourable. Listed companies' profitability has been high in 2005. The number of bankruptcies is continuing to fall. Corporate debt growth has risen, but is still moderate. With a high equity ratio and continued solid profitability in the corporate sector, the credit risk associated with loans to the corporate market is assessed as relatively low.
The themes presented in more detail in this issue of the Financial Stability report include the following: developments in house prices; the distribution of household debt, income and financial assets; and volatility in equity prices in Norway compared with volatility in other countries.
For further information, please contact Kristin Gulbrandsen, Director (tel. +47 22 31 60 92) or Birger Vikøren, Director (tel. + 47 22 31 61 42).
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