about providing loans when unemployment increases. if expectations about future house price inflation rise, it will be relatively more favourable to purchase a dwelling now rather than later. the result is increased housing demand and higher house prices today. price expectations depend both on observed developments in interest rates, income and house prices and on household expectations of future interest rates and income growth. housing demand also depends on population movements and demographic conditions such as cohabitation patterns, population size and the number of individuals in the start - up phase. net migration to central areas has been positive in recent years. this has affected regional house prices in different ways. norges bank has recently estimated a relation for house prices. the model contains effects of the housing stock, the unemployment rate, banks ’ lending rates after tax, total wage income in the economy and an indicator of household expectations concerning their own financial situation and the norwegian economy. in the work on the relation, we did not find any evidence to suggest that migration or demographic conditions have strong direct effects on house prices. however, demographic changes may affect prices indirectly by affecting overall wage income in the economy. the estimated relation provides a good explanation of house price developments in recent years. high wage income has pushed up house prices. the contribution from interest rate changes has also been high in the last two years but has diminished somewhat recently. in the model, interest rate changes have a strong short - term effect. house prices in norway have risen substantially since 1995. house prices have also risen rapidly in many other countries. the imf has expressed concern that house prices may be too high in relation to fundamentals in some countries. in norway, there have been signs recently of a slower rise in house prices. the seasonally adjusted, monthly rise has been low since november 2004, but it edged up again in april. on the other hand, the time it takes to sell a dwelling has declined further, whereas the number of dwellings sold remains high. housing starts increased substantially in 2004 as a result of high house prices, low interest rates and a favourable economic outlook. in oslo in particular, the level of residential construction activity has been high. increased housing supply will in isolation reduce the pressure in the housing market and contribute to reducing house prices. in the last inflation report, house price inflation is projected to slow towards 2008. the main explanation for this is higher interest rates, but increased housing construction will also be a contributing factor. lower unemployment has the opposite effect. growth in household debt is expected to slow as

of credit and stable capital flows and underpins the transmission mechanisms for monetary policy. price stability strengthens financial stability. low and stable inflation provides households and enterprises with a clear indication of changes in relative prices. this makes it easier for economic agents to make the right decisions and leads to greater price stability in financial and property markets than would otherwise be the case. developments in credit and asset prices have an influence on inflation. we take this into account in our interest - rate setting. we are also aware of the potential risks to financial stability. the current low interest rates make it easy to service debt. the household interest burden, i. e. interest expenses after tax in relation to the sum of interest expenses and disposable income, is low despite strong growth in debt. the interest burden will increase, however, when the interest rate reaches a more normal level. only 14 per cent of household loans are fixed - interest loans. this is low in relation to other countries and makes households vulnerable to an interest rate increase that is higher than currently expected. compared with losses on loans to the enterprise sector, losses on loans to the household sector were low during the banking crisis at the end of the 1980s. despite high real interest rates and a decline in income, households were largely able to service their debt. high interest expenses and a decline in income, however, forced households to reduce consumption. this led subsequently to lower turnover in enterprises and weakened profitability and debt - servicing capacity. in this way, households contributed to an increase in banks ’ losses on loans to the enterprise sector. the higher the household debt burden, the stronger the potential spillover effect from the household sector to the enterprise sector. the effects of weak economic developments and / or a change in interest rates on financial stability will depend both on the initial situation in households and enterprises and on banks ’ ability to absorb losses. an analysis presented in financial stability 1 / 04 showed that a sharp increase in interest rates and a subsequent fall in house prices may increase banks ’ losses to 2. 5 per cent of gross lending. this is roughly half of what losses were at the beginning of the 1990s. the moderate increase in loan losses is due primarily to an improved financial situation in the enterprise sector. banks ’ capacity to absorb loan losses depends on their results and their capital adequacy. in the same report, we assessed the capacity of the seven largest banking groups to absorb losses by measuring how large the losses would have to be over a three - year