Home Equity-Based Refinancing and Household Financial Difficulties: The Case of Norway

Housing prices in Norway and the Norwegian household-debt-to-disposable-income ratio have reached unprecedentedly high levels in recent years, raising debates about whether there is a serious housing bubble. Contributing to the debates, we study home equity-based refinancing in Norway and have two main findings. First, along with soaring housing prices, homeowners significantly withdraw their home equity. This cash-out accounts for at least one-third of outstanding household mortgages and hence substantially contributed to the high debt-to-income ratio. Second, households with large cash-out-to-income ratios are more likely to have financial difficulties. As cash-out refinancing is blamed to be one of the key drivers of the subprime crisis in the United States, our findings call for more attention to home equity-based refinancing in the Norwegian housing market.