Lars Gulbrandsen
Norwegian Social Research e-mail: lars.gulbrandsen@nova,no
Home Ownership and use of Housing Capital
1
From 1993 and until 2007 the housing prices in Norway more than doubled. This increase raised the net housing capital of Norwegian home owners and contributed much more to these household’s wealth accumulation than their pay off. For some years Norwegian banks have tried to tempt these home owners to take new loans for other purposes with their free value – the difference between rest of the home loan and the market value of the house - as security. For long time Norwegian home owners showed little interest in such loans. In the last two years however, the banks have succeeded in a considerable degree in this field of business and have strongly increased their sales of such loans arrangements. Today nearly one third of Norwegian home owners younger than 65, have agreed on such a loan arrangement.
The paper explains the incidence of such loans arrangements by characteristics of the home owners as age, household composition, income, financial capital and financial stress and characteristics of the dwellings as market value, LTV-ratio, location etc. The paper focuses also on more general attitudes towards depleting house capital in old age, both as dependent variable and as possible explanation why some home owners choose to agree on such arrangements and why others choose to keep their house capital intact.
1. Introduction
Home ownership is the most common tenure in Norway. At any time as much as 80 per cent of the households are home owners and between 90 and 95 per cent become home owners sooner or later in their life course (Gulbrandsen 2006). At the same time the housing standard as well as housing consumption is quite high. The households’ housing investment are
normally done by means of the raising of loans in some life phases, loans that are paid off later in the life course. Therefore net house capital normally is positive correlated with age. Paying off loans is only one possible way of wealth increase. The fluctuations of the housing market and house price cycles may be even more important.
In this paper we will explore the financial situation of Norwegian home owners based on data from a survey we carried out earlier this year. The main theme we focus is the willingness to deplete the capital to be found in the difference between the actual value of a family’s house and the family’s total debt. In this paper we call this difference the free value. We also explore the actual use of instruments to change this capital or free value into liquid resources. In part 2 of the paper we give a short note on the data we use. In part 3 we describe the housing price
1
) Paper presented at the ENHR Home Ownership and Globalisation Conference “Building on Home
Ownership: Housing Policies and Social Strategies”, Delft, The Netherlands, 13. and 14. November 2008. The paper is based on data collected in connection with of a research project financed by GE Money Bank
fluctuations in Norway since 1985. In part 4 we use our survey data to describe the home owners’ debt, their net housing capital (free value) and their total net property. In the two last parts of the paper, we focus in part 5 on the willingness to make use of the accumulated housing wealth and in part 6 on the actual use of different financial instruments making it possible to raise liquid capital.
2. Data
The paper is based on data from a nationwide representative survey carried out in the middle of June 2008. Since the data collection is based on an internet design, we have to operate with an upper age limit to get representative data. In Norway access to internet, either on job or at home, is so good up to middle of sixties that this method gives us good enough data up to this age (Gulbrandsen 2007). The survey was done by TNS-Gallup which is one of the biggest Norwegian firms doing public opinion poll measurements. The age range of the sample is 18 to 64. The sample consists of 3001 respondents. In our analysis we have omitted young
people still living in the home of their parents. We ended up with a sample consisting of 2617 persons. 83 per cent of these are home owners.
3. Housing Prices in Norway 1985-2008
As many others countries in Europe, the housing prices in Norway have been increasing for a very long period. Table 1 sum up the price fluctuation since 1985. In the 1980-ties a really strong housing price increase started in 1985 and ended in the spring of 1988. This upward move was followed by falling prices until the spring of 1993. The nominal prices were higher at the end of this period than they had been in 1985, but since the value of the Norwegian krone in the same period was reduced with 44 per cent, the real house prices were reduced with 22 per cent.
From the spring of 1993 the house prices have increased every year until August 2007. At this time the prices were more than three times as high as in 1992, while the Norwegian krone in same period according to the consumer price index only lost 34 per cent of its value. Since August 2007 the prices have decreased, but so far this decrease has been rather small. The figures in table 1 are mean prices for each year. At the moment the actual price decrease is much bigger than the decrease we observe when comparing the mean price for 2007 as a
whole and the mean price for the first ten months of 2008. In the last twelve months the actual price decease was 10 per cent.
Table 1 Price fluctuation in the Norwegian housing market 1985-20082. Source:
Eiendomsmeglerbransjens boligprisstatistikk, utgitt av Norges Eiendomsmeglerforbund og Eiendomsmeglerforetakenes Forening, utarbeidet av Econ Pöyry for FINN.no
Mean price per
square meter Yearly increase/decrease per cent Accumulated Increase/decrease per cent Consumer price index***** 1985 5100 100 1986 6700 31,4 107 1987 8200 22,4 60,8** 116 1988 8200 0 124 1989 7100 - 13,4 130 1990 6800 - 0,4 - 43,9*** 135 1991 6200 - 8,8 140 1992 5700 - 8,1 143 1993 6100 7,0 146 1994 7000 14,8 148 1995 7500 7,1 152 1996 8300 10,7 154 1997 9000 8,4 158 1998 10300 14,4 162 1999 11700 13,6 165 2000 13400 14,5 331,6**** 170 2001 14500 8,2 176 2002 15400 6,2 178 2003 15700 1,9 182 2004 17800 13,4 183 2005 19300 8,4 186 2006 22100 14,5 190 2007 24600 11,3 192 2008 24200* - 1,6 202****** * Until October 2008
** Increase in the period 1985-1988 *** Decrease in the period 1988-1992 **** Increase in the period 1992-2007 ***** 1985=100
****** 2008: only until October 2008
2
) All prices in this paper are reported in Norwegian kroner (NOK). Normally the rate of exchange between NOK and Euro is one to eight (you need eight Norwegian kroner to buy a Euro).
4. Housing capital and other assets
In the light of this strong and long lasting price increase the timing of house purchase ought to have great importance for the value of the households’ real assets. In the survey we asked the home owners about which year they bought their dwelling. We have no information about dwellings they might have bought before they bought their present home. As shown in table 2, only 10 per cent of the owners have bought in the last two years, but this groups don’t only include young first time buyers. 38 per cent of them were younger than 30. 30 per cent were between 30 and 39, 18 per cent between 40 and 49 and 14 percent elder than 49 (actually between 50 and 64). Since Norwegians attain home ownership quite early in the life course, we will find both second and third time buyers not only among people who are in the thirties or elder, but even among people under 30. According to the level of living survey carried out by Statistics Norway in 2004, 63 per cent in the age group 25-29 and 78 per cent in the age group 30-34 had become home owners (Andersen & Gulbrandsen, 2006). The corresponding rates in the same age groups from our survey carried out this summer were 65 and 79 per cents respectively.
Table 2 Norwegian home owners (younger than 65) distributed after the year they have bought their dwelling.
2007-2008 2004-2006 2000-2003 1990-1999 Before 1990 Number
10 % 18 % 20 % 25 % 27 % (2117)
In the light of the big increase of housing prices, the distribution of debt should in a great extent be a result of the time of house purchase. At the same time, the considerable
representation of middle aged people among the last buyers will produce a great variation in the size of debt, even among people who recently have bought their homes. Table 3 shows the distribution of the households’ total debt depending on which year the present dwelling was bought. Even among the recent buyers we find households that don’t have any debt. The range of variation is also biggest among the recent buyers.
Table 3 Norwegian home owners: Total debt in thousand NOK distributed after the year they have bought their dwelling
First decile 10 % First quartile 25 % Median value 50 % Third quartile 75 % Last decile 90 % 2007-2008 0 630 1313 1950 2500 2004-2006 0 590 1300 1800 2240 2000-2003 0 351 955 1460 1870 1990-1999 0 180 690 1222 1740 Before 1990 0 0 220 700 1300
The decreasing amount of debt resulting from increasing length of time since the last housing market experiences, indicate an opposite picture when focusing on what we have called free value. This is clearly documented in table 4. The table shows figures that are computed as the estimated market value of the household’s house minus the total amount of the household’s debt. Even among the home owners who have bought in 2007 and 2008, nearly three out of four have a positive free value. Independent of where we look into the distributions, the figures are higher the longer the time which has passed since the purchase.
Table 4 Norwegian home owners: The size of their free value in thousand NOK (estimated market price of their dwelling minus total debt) distributed after the year they have bought their dwelling First decile 10 % First quartile 25 % Median value 50 % Third quartile 75 % Last decile 90 % 2007-2008 -350 -10 410 1292 2350 2004-2006 -60 170 600 1400 2335 2000-2003 74 450 1130 1950 3095 1990-1999 246 700 1380 2400 3270 Before 1990 480 1000 1610 2500 3400
In table 4 we included total debt, not only house debt. In describing the total financial
situation of the households we have to include also other assets. In our survey we have asked about the estimated value of the family’s car or cars. Another important real asset for about 20 per cent of the households is holiday homes. We have asked about the estimated market price of such second homes. We have also asked about the size of bank deposits, and the value of the households’ stocks and shares and the value of their shares in mutual funds. Together with the estimated value of the house and the total debt, we use these data to compute the net wealth of the households. The distribution of this net wealth depending on the time of the last
home purchase is shown in table 5. Not very surprisingly these figures are much bigger than the figures in table 4. Even among household who have bought the house in the last one and a half year before our survey was done, a great majority have positive net wealth and the
median value is close to 100 000 Euro.
Table 5 Norwegian home owners: The size of their net wealth in thousand NOK distributed after the year they have bought their dwelling
First decile 10 % First quartile 25 % Median value 50 % Third quartile 75 % Last decile 90 % 2007-2008 -150 110 782 1940 3510 2004-2006 77 428 1050 2015 3115 2000-2003 250 820 1620 2700 4900 1990-1999 480 1080 2020 3245 5200 Before 1990 935 1520 2491 3635 5774
5. Willingness to spend housing capital
In several surveys since the beginning of the 1990-ties we have asked a question about spending of housing capital. The respondents have been presented for seven different alternatives and asked to choose the most suitable alternative if they were going to spend a possible house capital. You should note that we have asked about a hypothetical situation. People don’t need to have any house capital themselves to answer what they intent to do. The seven alternatives are presented in table 6.
Table 6 Attitudes towards spending housing capital. 1991-2008. Per cent. Respondents younger than 63 years
1991 2001 2006 2008 1. Would not spend anything of the housing capital 37 29 25 30 2. Sell the house to a financial institution with a right still
to be living in the house
3 4 1 1 3. Borrow money with the house as security 6 31 36 31 4. Realise capital by buying a smaller house 27 15 14 13 5. Realise capital by selling and become a tenant 6 4 1 2
6. Other 5 5 4 4
7. Don’t know. Not answered 16 11 19 20
All over there have been rather small changes in attitudes. A substantial increase both in free values and net wealth has not produced any stronger willingness to deplete such capital. The
change we can observe seems to have happened between 1991 and 2001. The change appears primarily in the balance between alternative 3 and alternative 4. In 1991, a majority of the respondents who intended to deplete housing capital would at the same time reduce what we may call their physical housing consumption. In 2001 and afterwards it was much more common to be willing to make use of the housing capital without doing any change in housing consumption.
In tables 7 we present the result of a logistic regression on the willingness to use a possible housing capital. The table shows the odds ratios for choosing one of the five alternatives from 2 to 6 shown in table 6.
Table 7 Logistic regression on the odds for depleting house capital among home owners 2008. Age. Ref group: Under 30
30-39 0,72* 40-49 1,00 50-64 1,24 Free value. Ref group: Less or equal 200 000 NOK
200 000– 700 000 NOK 0,78
700 000– 1 500 000 NOK 0.68
1 500 000 – 2 500 000 NOK 0.76
More than 2 500 000 NOK 0,75
Total net wealth. Ref group: Less or equal 500 000 NOK
500 000 – 1 000 000 NOK 1,24
1 000 000 – 2 000 000 NOK 1,84*
2 000 000 – 3 000 000 NOK 1.59
More than 3 000 000 NOK 1,52
The year of house purchase. Ref group: 2006-2008
2003-2005 1,03 2000-2002 1,43* 1990-1999 1,62**
Before 1990 1,50*
Gross household income. Ref group: First quintile Less than 350 000 NOK
2. quintile, 351 000 – 500 000 NOK 1,26
3. quintile 501 000 – 650 000 NOK 1,50**
4. quintile 651 000 - 800 000 NOK 1,38*
5. quintile More than 800 000 NOK 1,57**
The household’s liquidity. Ref group: Has always been able to pay bills etc. last year
Has sometimes not been able to pay bills etc. last year 1,31* Has often not been able to pay bills etc last year 1,76** ** p < 0.01, * p < 0,05
As we have grouped our variables we find few significant effects in the models. We also find some strange results. For instance it is strange that the size of the free value has no effect on the willingness to use such capital. Even if none of the coefficients are statistical significant, the odds for willingness to use such capital are lower in all groups of free values than in the reference group with the lowest free value. We find the opposite effect of total net wealth. Even if only the members of households with a net wealth between one and two million NOK have significant higher odds for being positive to make use of house capital, seen as one group only, people with net wealth higher than half a million NOK have a significant higher odds for having a positive attitude towards spending of housing capital than people with lower net wealth. We also find higher odds among people who have lived in the same house for some time. The same is true with people belonging to the three highest quintiles on the distribution of gross household income. At last we should notice the effect of the households’ liquid situation. Especially people who often have had problems with their payments
obligations have significant higher odds for having a positive attitude to house capital spending.
6. Actual use of housing capital
To answer a hypothetical question about the use of housing capital is not the same as actually making use of such an opportunity. Norwegian banks have for some years tried hard to convince home owners with high free value to enter into an agreement with the bank which gives the home owners an opportunity to spend more or less of their real capital. There had been developed flexible instruments which give the home owners an upper limit within which they dispose the money as they wish and pay interest of the amount of money they at any time are owing the bank. The use of such loan agreements, called rammelån or flexilån in
Norwegian, has really increased the two last years. In out survey, 27 per cent of the home owners answered that they had entered into such an agreement.
In table 8 we show the results of a logistic regression on the odds of having entered into such an agreement. We try two models; first with the same model we used in table 7 to analyze the willingness to spend house capital, next with a model where this willingness is incorporated as a right side variable.
Table 8 Logistic regression on the odds for having entered into an agreement about depleting house capital among home owners 2008.
I II
Age. Ref group: Under 30
30-39 3,06** 3,28**
40-49 2,80** 2,84**
50-64 3,01** 2,97**
Free value. Ref group: Less or equal 200 000 NOK
200 000 – 700 000 NOK 0,98 1,04
700 000 – 1 500 000 NOK 1,43 1,54
1 500 000 – 2 500 000 NOK 1,28 1,35
More than 2 500 000 NOK 1,69 1,81
Total net wealth. Ref group: Less or equal 500 000 NOK
500 000 – 1 000 000 NOK 1,52 1,46
1 000 000 – 2 000 000 NOK 1,70 1,55
2 000 000 – 3 000 000 NOK 1.68 1,55
More than 3 000 000 NOK 1,38 1,29
The year of house purchase. Ref group 2006-2008
2003-2005 1,19 1,18
2000-2002 1,27 1,20
1990-1999 1,12 1,04
Before 1990 1,14 1,07
Gross household income. Ref group: First quintile. Less than 350 000 NOK
2. quintile 351 000 – 500 000 NOK 1,67** 1,61* 3. quintile 501 000 – 650 000 NOK 1,66 ** 1,54* 4. quintile 651 000 - 800 000 NOK 2,29** 2,20**
5. quintile More than 800 000 NOK 1,62* 1,51*
The household’s liquidity. Ref group: Has always been able to pay bills etc. last year
Has sometimes not been able to pay bills etc. last year 1,35* 1,31* Has often not been able to pay bills etc last year 1,02 0,95 Attitudes towards use of housing capital. Ref group: Don’t intend to use
Don’t know 0,88
Are willing to use housing capital 1,77**
** p < 0.01, * p < 0,05
In model 1 we observe statistical significant effects from three variables. To be elder than 29 strongly increase the odds for having made an agreement. However, we don’t find any big difference between the age groups from 30 and elder. We also find that increasing gross income increase the odds for having entered into an agreement. Compared to the reference group, however, the odds is a bit lower in the highest income quintile, may be due to less need for such loan arrangement among people belonging to the highest income group. While the
odds for being willing to spend housing capital was highest in the group with most frequent liquidity problems, the odds for having entered into such a loan agreement is biggest in the group with less frequent problems. People in a tight financial situation will probably never be invited to enter such an agreement.
The introduction of the attitude variable in model 2 don’t change the results very much, at least concerning the questions of which effects are statistical significant or not. We should notice that the coefficients for the odds of the groups with different free values show higher values, still however without becoming statistical significant. At the same time all of the coefficients showing the odds of the different groups of total net wealth are reduced. The same is the case for the coefficients showing the odds of different income groups. We find a unique and rather strong effect of the attitude variable. Not very surprisingly, the odds for having entered into an agreement which open up the opportunity to spend some of the free capital placed in a house, is much higher among people with a positive attitude towards such spending than among others.
7. Discussion
The results from the analysis of the last regression model indicated that a positive attitude towards such spending was an important factor for predicting actual use. However, there is not any one to one correlation between attitudes and behaviour. Among owners who either say they will not spend a housing capital or don’t know exactly what to do, about 20 per cent have entered into a loan arrangement. Among owners who intend to spend a housing capital, 33 per cent have really done it by entering into an agreement. Turn the other way, 64 per cent of the respondents with an agreement express a positive attitude to spending, while 48 per cent of the respondents without an agreement do the same. Apparently a lot of owners who wish to have an agreement never will be offered an agreement because they either don’t have enough free capital or have not always met their other payment obligations. At the same time a lot of owners with good economy and high free values, don’t enter into any agreement just because they don’t need it. Even if the use of such agreements have increased strongly in the last two-three years, still a majority of more than 70 per cent of home owners in the age group we have investigated, don’t have made any agreement. Both the credit risk and the credit cost will be lowest without the use of this opportunity.
References:
Andersen, Arne Støttrup & Lars Gulbrandsen (2006): Boligetablering, in Gulbrandsen, Lars (ed): Bolig og levekår i Norge 2004. En artikkelsamling. Norsk Institutt for oppvekst velferd og aldring. Rapport 3/06, pp 117-129
Gulbrandsen, Lars (ed) (2006): Bolig og levekår i Norge 2004. En artikkelsamling. Norsk Institutt for oppvekst velferd og aldring. Rapport 3/06.
Gulbrandsen, Lars (2007): Gjeld til å bære? Norske husholdningers gjeld og lånelyst sommeren 2006. Norsk Institutt for oppvekst velferd og aldring. Rapport 11/07.
