A persistently high rate of increase in house prices can in isolation engender expectations of a further rise and can thus prove to be self-reinforcing for a period and push up credit demand. At the same time, the switch to a flexible inflation targeting regime reduces the possibility of exposing households to a double shock in the form of higher unemployment and higher interest rates, as was the case prior to the banking crisis in the beginning of the 1990s. If the economy is exposed to disturbances that may lead to higher unemployment, inflation will normally decline and interest rates will be lowered. High debt growth increases the vulnerability of households to economic disturbances. As a result of low interest rates, the household interest burden will remain fairly low in spite of high debt growth. It may prove to be particularly challenging for borrowers to assess their debt-servicing  4  BIS Review 53/2004  capacity over time in a period when the interest rate is abnormally low. Such a low interest rate also places particular demands on banks in assessing the creditworthiness of borrowers. The interest rate can be used to reduce credit demand. At present - with low interest rates abroad and a close link between domestic interest rates and the krone - a tighter monetary policy would restrain credit demand primarily because job security would be reduced as a result of a stronger krone. Summary of the situation in the Norwegian economy A turnaround in the Norwegian economy has occurred.

FINANCE AND HOUSING IN CENTRAL AND EASTERN EUROPE: A DEMAND-SIDE APPROACH Liviu Voinea, Deputy Governor, National Bank of Romania Finance and Housing Panel, Bruegel Annual Meetings 2017  In 2015, ESRB published the Report on residential real estate and financial stability in EU. In November 2016, a detailed assessment of countries with high vulnerabilities followed.  AT, BE, DK, FI, LU, NL, SE, UK were identified as having medium term vulnerabilities on the Residential Real Estate (RRE) market. No CEE country was singled out.  The ESRB methodology is based on the concept of “stretch”, applied to households, collateral, and banks.  Household stretch refers to vulnerabilities related to borrowers’ indebtedness and ability to repay debt, as well as their capacity to maintain their consumption pattern. Main indicators: household debt % GDP, financial assets to debt, debt service to income.  Collateral stretch refers to vulnerabilities relating to the property market. Main indicators: residential price index, house price to income.  Banking stretch refers to vulnerabilities related to direct losses by banks and due to their RRE exposures. Main indicators: loans for house purchases, loans’ growth rate and trend.  The report finds that the structural features of the RRE markets can be grouped into demand-side, supply-side and institutional factors. The demand side factors include: household income, credit availability and interest rates, home ownership rates, demographic factors. On the supply side: residential investment, housing construction and construction costs. Institutional factors: housing taxes and subsidies, mortgage contract features, foreclosure and insolvency procedures.