Two weeks ago we won a bid on a house.
What followed was a dizzying foray into the Norwegian mortgaging process, taxes, and other administrative policies.
The loan approval, we thought we had was suddenly voided due to small print, the price we paid was not including all the taxes, and well everything was very much in Norwegian, and we didn’t graduate at the top of our language class.
Still, late last week we finalized everything and now have an awesome new house to move into mid February. I’ll have enough time to do my nesting, and our loan repayments will be just a little more than what we are currently paying in rent for our basic and cold one bedroom apartment.
However, all said and done, what has puzzled me most is the strange phenomena of the Norwegian housing market.
- Norway has one of the highest home ownership rates in the world. Even students tend to own their apartments.
- Interest rates are low (3.4 – 3.8 %), making a 20 year loan rather affordable
- Renting is expensive, and the rental market is very small.
- There is no capital gains tax
- House prices have been steadily on the rise
- You receive further tax deductions if you own a house
What all this means, is if you’re living in Norway, it makes no sense to rent. You buy a house, and effectively live in it for free, since the loan repayments (interest and capital) are less than what you would pay in rent and will be covered by the increase in house price.
What I didn’t understand then, is how this doesn’t trigger slum lord businesses, which in turn balances out the rent/own pricing ratio. If you can’t lose money on buying a house, and you can rent it out for more than what your loan repayments will be, why not buy house after house after house?
The answer to this first started to come to us, as we were finalizing our mortgage agreement.
First off, if it’s a free hold property, you must pay 2.5% stamp duty on the purchase price of the house (and banks will not provide financing for this). It’s kind of like a ‘pre’ capital gains tax. So, if you’re into speculatively buying and selling houses, you really need to know what you’re doing since you will be quickly paying a lot of tax.
Our second enlightenment came when we were finalizing our repayment options.
When we did this in NZ, we had both the loan manager, and financial adviser spend some hours explaining to us all the different repayment options. What rate of interest vs capital would we like to repay? Would we like a table mortgage, reducing mortgage, or an interest only loan? What about a revolving floating mortgage, or would we like to fix it for a certain number of years?
Here it was slightly different.
We met with our loan manager. She provided us with two accounts
- Transaction account
- Savings account
The loan was set at 20 years for 3.8% interest. No discussion. No fixed terms. The bank would take the monthly repayments from the transaction account, and everything else we could move to the savings account if we so wished.
I asked if we could change the terms and increase the payments so we pay back over ten years instead.
The loan manager looked puzzled, but replied “Yes, of course you can do that. Just let me know when and how much, and I’ll update it”
But she had the look on her face of “why would you want to do that?”
So, why would we want to pay back our loan faster?
The obvious answer of course is to save money in the long run. Paying back the loan faster, means paying less interest to the bank. Keeping money at a lower interest rate in a savings account is costly and makes no sense.
Except in Norway.
It turns out if your net worth (savings and capital aka property) exceeds 470000 nok (approx 100,000 NZDs), you start paying wealth tax. 1.1% of everything over that threshold. If you have paid off your home loan, it can get expensive fast and your net worth starts depreciating.
And so, you create a culture of spend, spend, spend.
New cars, and expensive first class holidays to Spain.
As I have observed several times, Norwegians simply have no concept of risk or ‘saving’ money.
Why would they?
They live in the most socialist country in the world, with the most boring stable economy.
Everything is generously provided for by the government – health care, education, child care, welfare, and pensions. If they accumulate too much wealth they are taxed, so better spend it instead. Need to buy a new car, or boat, and don’t have the savings? No problem, just take out a loan.
Garage sales, and buying second-hand is for immigrants.
However, with house prices increasing faster than economic growth, is all this really sustainable?
We don’t really know.
Our friend the finance professor tells us the government is unlikely change existing regulations for homeowners, or put up interest rates since it would be political suicide.
Maybe over time home ownership rates will drop as homes become less affordable, and renting becomes a real option.
Or maybe the government will embrace the country’s national past-time and introduce yet another tax.