The effect of Loan-to-Value restrictions on Norwegian household debt

Abstract

Household debt has reached record high levels in Norway and is considered to be a threat to the financial stability. To dampen the rapid accumulation of household debt and increasing housing prices, the Financial Supervisory Authority of Norway has introduced loan-tovalue restrictions on mortgages of 90% in March 2010 and 85% in December 2011. This study contributes empirical evidence of the effect of these loan-to-value restrictions on Norwegian household debt. Firstly, we show that there are self-reinforcing effects between housing prices and household debt, using a structural VARX model. Secondly, we extend this particular model and show that the restrictions apparently have failed to dampen household debt on an aggregate level. Thirdly, using a single-equation model for household debt, we provide evidence that the restrictions have slowed down the growth in household debt among young people. This effect, however, has been counteracted by an increase in the older generation’s household debt, which can be explained by (grand)parent financing as well as a higher willingness of holding debt among the elderly. We therefore conclude that loan-to-value restrictions can be seen as a valuable tool for reducing the accumulation of debt among the younger and more sensitive group. They may, however, have limited power to dampen household debt on an aggregate level.