The experience of the financial crisis has prompted governments and others to put liquidity risk higher on the agenda. In June, the Basel Committee on Banking Supervision published Principles for Sound Liquidity Risk Management and Supervision. 3  3  See Basel Committee on Banking Supervision, Bank for International Settlements, June 2008. BIS Review 110/2008  3  Norges Bank has a role as lender of last resort. This means that Norges Bank can provide an individual bank or the banking system with extraordinary liquidity when demand for liquidity cannot be satisfied by other sources. 4 Our view is that the provision of extraordinary liquidity should be restricted to situations when financial stability may be threatened without such support. Experience shows that the seeds of financial instability are sown during periods of rapidly rising debt and asset prices, including house prices. Over the past 15 years, house prices have surged, and particularly in 2006, even though Norges Bank had at that time already raised the interest rate on several occasions. High household income growth and bank competition for lending and market shares are contributing factors. Nor can we disregard the possibility that in periods developments have been driven by the conviction that prices would only continue to rise. Unusually low long-term interest rates have probably also fuelled house price inflation in recent years. Norwegian households primarily finance home purchases with adjustable-rate mortgages. Nonetheless, long-term interest rates are important because they provide information about developments in short-term rates that borrowers can expect over time.

On this score, our experience has been fairly positive with a high level of residential construction in recent years. The tax system should treat investment in residential property neutrally and on a par with other investments. Several official studies in recent decades 7 – from Sekse to Skauge – have shown that the tax system favours residential property consumption and investment. This leads to overinvestment in residential property, displacing other types of investment. At the same time, the tax system makes it more advantageous to own a home instead of renting. Through the years, the tax on the advantage of homeownership has been gradually reduced. In 2005, it was removed. Tax deductibility of debt interest was maintained. In practice, this implies a housing investment subsidy. Homeowners benefit from an income deduction for expenses for income acquisition, but do not pay taxes on the income. In central areas where available sites are scarce, the tax advantage will result in a higher level of house prices. A more neutral taxation of residential property – for example as proposed by the Skauge Commission in 2003 – would also have a stabilising effect on the price level in the housing market. A tax that is based more on market values will increase when house values rise and fall when house values decline. This will curb the willingness to pay when purchasing homes during upturns and sustain it during downturns. The exemption for residential property tax is a source of more unstable house prices and credit cycles.