OECD Warns Norway On Household Debt

While Norway has a strong and well-managed economy, high household debt and elevated house prices "pose a risk," said the Organization for Economic Cooperation and Development Wednesday.

"Low interest rates may have been encouraging the real-estate boom," the OECD said in an economic survey of Norway, adding that the house price and household debt vulnerabilities should be addressed by "macro-prudential policy and consumer protection." The level of floating-rate loans is unusually high, making Norwegians vulnerable to rate increases, it said.

The OECD said "the strength of the economy and prudent supervision" have helped the Norwegian financial system to weather the financial crisis well, and that Norway continues to benefit from its "well managed petroleum wealth and sound macroeconomic policies," with high levels of well-being and social cohesion. But it also called for changes in the country's tax system.

Norway should consider reducing "the implicit tax subsidy on owner-occupied housing," the OECD said, by introducing taxes on imputed rental income or a national property tax, or by phasing out tax deductions on mortgage interest.

The taxation of capital in Norway should be changed as it "imposes distortions on savings," the OECD said. It pointed to ministry of finance calculations suggesting that taxation of real returns can be over 100% for fixed-income assets and equity shares, and as low as 0% for owner-occupied housing.

The OECD warned that "the extraordinary tax advantages" to housing investment may lower economic growth, as people invest money in property instead of more productive categories of investment. This could boost house prices and household debts and make the financial system more vulnerable, it said.

Norway should ensure that banks comply with higher capital requirements, the OECD also warned. It said Norges Bank's stress tests show that banks would be vulnerable if there were to be another financial crisis, worse than the one in 2008-2009.

Norwegian inflation remains well below the central bank's target of 2.5%, and the OECD said Norges Bank "was right to suspend the tightening cycle and then cut rates in December," amid turbulence in the financial markets. There is room for further rate cuts if the conditions deteriorate, it added.