In the land of Norway, especially in the big cities, it is extremely hard to buy your first home before you are 35 years old. This is often because we do not earn that much money in our early age. We go to school to study and when we are done, we get a huge school-loan we need to pay off. We also need to cover the expenses of renting an apartment, paying down our car-loan and maybe we even used the credit card when we were students (I did). Not a secret but, we need food, we need to pay for the cost of electronics like TV, mobile and computer. Your electricity and internet are probably not for free as well. The list is long. Point being that in the early stage of working life this gives us a little to nothing left for savings.
Just to make it even more difficult to get your first home the government made a rule that they called “Mortgage Regulations”. The regulation provides guidelines for how much loan you can get from a bank. The regulation state, among other things that:
“you must have 15% equity on your first real estate property, and that you can borrow a maximum of five times your income”.
When you graduate from your master’s degree you earn like $40 000 a year, but when the average apartment in the big cities (where you want to live when you are young) are priced at $500 000, the above regulations become major obstacles. Just to quantify the regulations, it might get clearer:
Equity needed to buy a home = $500 000 * 0.15 = $75 000
You can get a loan of maximum five times your income = $40 000 * 5 = $200 000
As you probably understand the above equation is extremely hard to achieve for “the man on the street”. It really requires great effort from our side in terms of saving money. Therefor the banks have created different incentives for the younger generations in Norway. But how good is the incentives?
I have done some research and “the best” incentive that the banks have made up is the BSU – “Boligsparing for Ungdom”! Which is translated to something like; “House savings for young people”. If you have the possibility, BSU is what you NEED to fur fill your dream of buying your first home (at least that is what the banks promote). There are of course some conditions for BSU to work. You need to be younger than 34 years and the money you save needs to be “earmarked” your first home. If this does not fit, you will not be allowed to take part of the benefits of BSU. Let me take you through the rules and benefits of the BSU.
BSU – rules and benefits
Within the BSU scheme, you can save approx. $3500 a year. The maximum total amount you can save is $35 000. To reach this total, you must save a maximum amount of 11 years. You are free to save from zero to $3500 as appropriate. You get deducted 20 percent directly from the tax. In total, you can therefore achieve $7000 in tax deductions, and a maximum of approx. $640 in one year. For you to receive the BSU deduction, the money must be in the account for the rest of the year. If you withdraw the money the same year as it is deposited, you are not entitled to the deduction that year. After withdrawing money from your BSU account, you cannot save anymore. For example, if you take out the money for a home purchase, you cannot own a BSU account anymore. You do not have to save every year. If the amount is not used for housing (or coverage of claims in the event of bankruptcy), previously given tax deductions must be repaid. There is no requirement that the amount must be used before you are 34 years old. As of interests, your bank will decide, in 2021 it is approx. 3%. As you might have thought of already, both tax deductions and the interests you get on BSU makes you a high ROI (Return on Investment). We are talking about 20% tax deduction and 3% interests which will make you a return of 23%, which is RISKFREE! Now, that is what I call a smart placement of your money!
The BSU is a particularly good incentive for young people. Still, it is not good enough given the market conditions in Norway. Let me elaborate; If you were lucky to get a job when you turned 22 years old (bachelor’s degree is 3 years and you graduate from high school when you are 19 years old) you would most likely have a yearly salary of $40 000. Now, let us do some assumptions on your budget when renting an apartment in the capital city of Norway: Oslo.
Assuming you are 22 years old, single, and renting an apartment in Oslo. You have a great job with an annual salary of $40 000, which gives you a monthly salary (after tax) of $2400. You want to have a good life when you are young, wild, and free, so you create a budget (USD) like the one below:
After your monthly costs is written down you can see that you only have 200 bucks left. That is not much. Especially when the yearly BSU quota is $3300 or around $300 a month. That means that you are $100 bucks short, every month if you want to fill the quota of BSU. The average saver in Norway saves around $200 a month. What do you do? Move out of town? Get an extra job? Skip the nightlife? Ask for a raise at work? We clearly need to do something here if we want to be able to buy a house one day.
However, let us say that you manage to save your BSU quota. To repeat myself that means saving $3300 every year until you are 34 (you started saving when you were 22). After 12 years of saving, you would end up with approx. $40 000 ($3300*12 = $39600). Note: I did not consider the interest rate and the tax deduction on BSU, I assume you save that for the next year BSU quota (especially if you only have 200 buck’s left after costs).
Congratulations! You have now saved for 12 years! The average apartment in Oslo in 2021 is $500 000. To remind the reader, the mortgage regulations of Norway created by the government:
“you must have 15% equity on your first real estate property, and that you can borrow a maximum of five times your income”.
Hmm ok, let's look back at the first formula we wrote initially:
“you must have 15% equity on your first real estate property”.
Equity needed = $500 000 * 0,15 = $75 000
Ok, that means that I am halfway there! It took me 12 years to save $40 000. If I save 12 more years, which means, if I am lucky, I get to buy my first apartment when I am 46 years old, right? That is not entirely certain because in 12 years the prices on real estate will most likely be higher. If we follow the consumer price index of 2% yearly growth the price of an average apartment in Oslo would be approx. $609,497.21 (The annual average price increase for the last 10 years has been approx. 7%). That is even not the worst part because, when we take the second equation into consideration as well, it is getting extremely ugly:
“you can only borrow a maximum of five times your income”.
Five times your income = $40 000 * 5 = $200 000
I can only get a loan of $200 000. That means that if I want the apartment worth $500 000, I need to save $75 000 plus another $225 000 in order to get a buying power of $500 000. Let’s put it into perspective; if we use the first formula and add it to the second formula, it means we need to save for 90 years (excluded the price increase). As you see this is not possible and you need to figure out something else.
This brings me to the conclusion that “the system” say that they have a lot of incentives, but the incentives do not work in the environments that we are in. It is just not good enough, leaving the young middle-class people with great education behind. This is also a great example of when the poor gets poorer and the rich get richer. Note: There are those who have wealthy parents that can work as a safety for the banks so that the younger generations are able to get into the real estate market. In my opinion I do not take these people into consideration because then you have not accomplished buying a home for yourself.
What incentives do you have in your country or do you have any? What could be done in order to help people raise capital so that they can buy themselves the property they deserve?
Cheers
-Olebulls