* FSA: Ongoing house price correction is necessary
* Household debts at 222 pct of income
* Currency has weakened over housing worry (Adds quotes, background)
By Camilla Knudsen
OSLO, Nov 29 (Reuters) - Norway’s rising household debt burden and still-high housing prices make the economy vulnerable to an economic downturn, the country’s Financial Supervisory Authority (FSA) said in a semi-annual report on Wednesday.
While housing prices have fallen somewhat in recent months, they are still at high levels after rising steadily for more than two decades, and are also high by international standards, the regulator added.
“Norwegian housing prices are high whichever way you measure them. Everybody wonders what will happen next, as do we,” FSA Director General Morten Baltzersen told a news conference.
The possibility of a prolonged period of falling house prices cannot be ruled out, but improved growth prospects and continued low interest rates could also rekindle house prices, he added.
“A correction is healthy, and we could still see a fall for some time ahead without it being a crash,” Baltzersen said.
With household debt at 222 percent of disposable income, Norway imposed temporary restrictions on mortgages from early 2017 to help cool the housing market, and the Finance Ministry has asked the FSA to evaluate whether to extend or alter the regulations which are otherwise due to expire in June 2018.
Housing investments have overtaken the oil industry as Norway’s main driver of economic growth in recent years. New home sales rose to their highest level in four decades in 2016 as low interest rates and a rising population spurred demand, although they have slowed more recently.
In early 2017, the growth in housing prices stood at 13 percent year-on-year, the fastest rate of expansion in a decade, but the tightening of mortgage lending has since helped bring about a fall.
“It’s anyway better that prices drop now than at a later time, and a further increase would have made us even more vulnerable and brought even more risk to financial stability,” Baltzersen said.
With a tightly integrated banking market, regulators across the Scandinavian region have expresses worries over a rapid rise in household debts and the potential impact on financial stability and the wider implications for economic growth.
In Denmark, risks are building as several banks have eased credit standards, granting loans to more vulnerable clients, and some banks do not have sufficient capital to meet buffer requirements, the central bank said on Wednesday.
In Sweden, the third of the Scandinavian countries, the government will approve the banking regulator’s plan to tighten mortgage repayment rules despite warnings it could deepen a fall in house prices, sources told Reuters on Tuesday.
In Norway, the sale of new homes has stalled in recent months and will soon lead to an abrupt slowdown in construction, Chief Executive Baard Schumann at Selvaag Bolig, one of the country’s top builders, told Reuters.
Forecaster Prognosesenteret meanwhile predicted new homes sales would begin to recover in the autumn 2018, provided that mortgage restrictions are softended.
The free-floating currencies of both Norway and Sweden have weakened sharply against the euro in recent months as investors worry over declining housing prices and its effect on the wider economy. (Writing by Terje Solsvik, editing by Gwladys Fouche; Editing by Toby Chopra)