svein gjedrem : housing finance in norway speech by mr svein gjedrem, governor of norges bank ( central bank of norway ), to the norwegian covered bond forum, oslo, 27 january 2010. the text below may differ slightly from the actual presentation. this lecture does not contain assessments of the economic situation or current interest rate setting. * * * from state to private housing finance after the second world war, the credit market in norway was regulated. credit demand was high. the norwegian state endeavoured to steer credit flows towards priority sectors and the state banks therefore played an important role as credit intermediaries. there were considerable housing shortages after the war. for some population groups, living conditions were poor. in1946, the norwegian state housing bank was established to provide credit for new residential construction. this bank and statens landbruksbank ( the state agricultural bank ) dominated housing finance for new house purchases up to the 1980s. state bank mortgage rates were initially set based on political objectives, but were over the years gradually revised up and adjusted to market rates. with the gradual deregulation of the credit market in the 1980s, state lending institutions assumed a lesser role in housing finance and the private market took over. sales of existing homes increased. in 1992 private banks provided the majority of residential mortgages. their share of housing finance was also high compared with other nordic countries. in denmark and sweden, mortgage institutions were the primary source of residential mortgages. even though their importance has been reduced in recent years, mortgage companies still provide most residential mortgages. with the predominance of mortgage companies, fixed - rate mortgages have been a tradition in denmark and sweden. this has not been the case for norway. mortgages from the state housing bank were primarily adjustable - rate loans. after credit market liberalisation, adjustable - rate mortgages were also offered by banks. the supply of fixed - rate mortgages was limited. fixed - rate loans are less common in norway than in the other nordic countries. from the 1980s to the 1990s, the norwegian economy moved from high to low inflation with, until recently, falling nominal long - term interest rates. borrowers with fixed - rate mortgages fared poorly in this period, and even more poorly than maturity or mortgage insurance premiums alone would imply. but with a clear monetary policy objective to keep inflation low and stable – and with an independent central bank tasked with achieving this objective – the result would be

particularly affected by the competition from china. in japan, where growth has been low for a long period, there are indications that growth is picking up, although it is still too early to say whether it is sustainable. the key rate in the euro area has been reduced to 2 per cent. forward rates imply that interest rates are expected to remain at 2 per cent to the end of 2003, before rising slightly next year. gdp growth in major european countries is low or negative. in the netherlands, gdp has dropped for three consecutive quarters, and germany has recorded a decline over the past two quarters. france ’ s gdp showed growth in the first quarter and a decline in the second quarter of this year. for the euro area as a whole, preliminary figures indicate zero growth in the second quarter. some consumer and business confidence indicators have recently shown signs of improvement, and the eu commission ’ s estimates point to moderate growth in the next few quarters. there are, however, no clear signs of an imminent and rapid recovery. among our trading partners as a whole, economic developments over the past year have been far weaker than norges bank and others, both analysts and international organisations, had expected. growth projections for 2003 have been revised downwards substantially over the past year, reflecting the effect on the world economy of a number of negative shocks such as the war in iraq and sars. global growth is still expected to pick up gradually towards a more normal level, but the upswing may come at a later stage than previously assumed. however, we cannot rule out the possibility that the global economy is facing a relatively long period of stagnation with low and possibly falling inflation. this risk is reflected in the low short - term interest rates in the us, europe and japan. long - term interest rates have edged up again recently. this may be an indication that financial market participants are now somewhat more optimistic and expect that the economic policy stimulus will have the desired effect. in spite of weak economic developments, oil prices have remained high. low levels of production in iraq have contributed to holding up oil prices. strikes and production problems in venezuela and nigeria have also played a role. these developments may keep oil prices high until growth in the global economy returns to normal. the oil industry will then have come through this period of sluggish growth in the global economy since 2000 without a fall in revenues. this has, in isolation, curbed the effects of the international downturn on norway. however, the situation, as a