Made a safe haven for global capital by its oil-driven prosperity, Norway is struggling to contain the sort of housing market bubble which launched four years of global financial turmoil.
Having bounced back from a recession in 2009 with the help of its huge reserves of rainy-day oil cash, low interest rates have kept Norwegians borrowing at the sort of pace that prompted banking and housing crashes in the UK, U.S., Spain and Ireland.
Borrowing this year is expected to grow twice as fast as wages and households' debt is set to top 200 percent of their disposable incomes – more than twice that in Germany and a third more than the peak in the U.S. before its crash.
That has already made house prices almost unaffordable for some and the question is what happens if and when interest rates or unemployment rise from near record lows.
"If my mortgage rate goes up one percentage point, our vacation to Malaga would be gone," says Erik Aasland, a 32-year-old professional in Oslo.
"If the mortgage goes up three percentage points, then there's no Malaga, or anything else for that matter," he added. "I could still pay but it would be a close call and there would be no reserves."
PRECARIOUS
Interest rates stood at 5.75 percent as late as the end of 2008 but the central bank cut them as low as 1.25 percent to support growth in 2009 and is headed back in that direction in a bid to stop the crown currency gaining further and damaging the economy's precarious competitiveness.
Returning rates to more normal levels, which seems like just a matter of time, the bubble could burst, cutting back disposable income, damaging undercapitalised banks, lowering retail spending and slowing growth.
"The growth rates of household debt and house prices are not following a sustainable path," says Morten Baltzersen, the Director General of the Financial Services Authority.
"The overall debt ratio of the household sector is still growing from a record high level, and the house price level is increasing rapidly from a record high level," Baltzersen added.
That echoes a recent warning from ratings agency Fitch that low rates risk pushing house price even higher, leading to an overheating in domestic demand and risking a painful correction.
At the heart of the problem is the economy's success to date. Investors fleeing the euro zone's debt crisis have seen the crown as a safe bet, given it is backed by an economy with a massive oil sector, a $570 billion wealth fund and no public debt. Even without the oil sector, Norway will grow 2.5 percent this year while its jobless rate is just over 3 percent, a third of that in the single currency area.
That's pushed property prices up around 9 percent a year for the past decade and a half, and prices could rise another 6.5 percent in 2012, twice as fast as wages. In January, annual growth was over 8 percent and prices hit new records.
"Human beings always have an amazing capacity of not learning from other people's mistakes," says CMC Markets analyst Michael Hewson.
"When house prices start to flatten out or come back down, that's when you really have to worry, that's when banking balance sheets can deteriorate very quickly," he added.
RATES TO RISE, NO IF BUT WHEN
Banking crises are not alien to Norway. In 1991 several top banks had to be rescued by the state.
Officials are well aware of the problem, and have taken steps to stem the risks, allowing banks to loan only 85 percent of a home's value, down from 90 percent last year, a move that helped to defuse a housing bubble in Sweden.
"The interest rate burden will become historically high for hundreds of thousands of households," central bank Governor Oeystein Olsen predicted.
But while Swedish home prices fell in 2011 without much stress to the bank sector, it was moderately higher interest that did much of the trick there, a luxury Norway cannot afford.
Still DNB, the nation's top lender with a third of the market, says it does not share concerns of a housing bubble and has tightened up lending, as mandated by the regulator.
Critics argue Norway really is different from the likes of Ireland or Spain, where much of the lending was for investment properties rather than first homes.
Norway's population is growing more than three times as fast as Europe's, thanks to immigration fuelled by solid growth. Construction hasn't been able to keep pace, so real demand is partially behind price rises.
Household savings rates remain high and non-performing loan rates are barely visible.
"We have done modelling and even with rates of 6, 7 or 8 percent, most households would cope," said Christian Vammervold Dreyer, the head of real estate agents' association NEF.
The household savings ratio is seen steady at 8.6 percent this year, indicating households do have some buffer. Problem loans to household are seen at just 0.9 percent of all household lending, a third of the level compared to corporate lending.
But while households have some capacity to handle stress, banks do not have too much room.
Norges Bank has told banks to build up capital, preferably by reducing dividends, and said banks lack sufficient liquidity buffers. That is echoed by the regulator:
So a banking collapse does not appear likely but the housing bubble still threatens to weaken in an otherwise model economy.
