Household debt growth has been higher than income growth since 1999. The debt burden, defined as debt in relation to disposable income, has therefore increased markedly. Households’ financial position is nonetheless sound. As measured here, housing wealth in Norway is almost four times higher than total household debt. Debt and wealth are, however, unevenly distributed. Combined with any marked turnaround in the housing market, this would create problems for exposed groups. However, the financial situation of households as a whole is satisfactory. Unemployment is unusually low, but must be expected to increase somewhat in the medium term. Household disposable income is expected to show continued high growth ahead. Due to the long period of strong debt growth and sharply rising house prices, however, households’ financial position has become more vulnerable. Corporate sector Corporate profits have been very high in recent years. These positive developments have been broadly based and are mainly driven by favourable economic conditions in Norway and abroad. Enterprises have on average large financial buffers. Banks’ lending to the property industry accounts for approximately one third of their lending to the corporate sector. This sizeable exposure to one industry is a possible risk factor in relation to financial stability in Norway. Both property enterprises and their tenants are in a generally healthy financial position. Prices in the commercial property market have risen considerably in the past two years, and market participants are expecting the sharp rise to continue. Lower demand in the Norwegian economy may result in a slower rise than the market expects.

Risk factors related to domestic conditions Events that have taken place abroad are actually more a liquidity crisis rooted in uncertainty about the valuation of assets and the distribution of losses among institutions than a crisis due to the size of the losses themselves. The credit risk for the more senior tranches of subprime CDOs is probably manageable. But we should not forget credit risk in the traditional sense when we assess risk elements. Loans to Norwegian households and enterprises account for approximately 70 per cent of banks’ balance sheets. Risk factors related to these customer groups are therefore very important to financial stability in Norway. Households Strong household debt growth and the sharp rise in house prices constitute a risk factor with regard to financial stability in Norway. Household debt growth has been high since 2000, primarily driven by low interest rates and a sharp rise in house prices and income. Loans secured on dwellings have shown high and increasing growth. Strong competition between banks has pushed down lending margins. The new capital adequacy rules (Basel II), which involve a substantial reduction in risk weights for mortgages, may also have contributed to the rise in mortgage growth and the decline in lending margins. Real house prices, deflated by consumer prices, building costs and house rents, are historically high. Deflated by disposable income, however, house prices have only risen moderately over the past ten years. In recent months, there have been signs of a slackening in the housing market. The rise in house prices has slowed.