Norway’s Possible Housing Bubble

Statistics Norway reports that the country’s house price index was up 6% in 2012 when compared to the previous year and experts at the International Monetary Fund believe …

Statistics Norway reports that the country’s house price index was up 6% in 2012 when compared to the previous year and experts at the International Monetary Fund believe properties there may be overvalued by as much as 20%. Experts say it’s a combination of low interest rates, subsidized owner occupancy and the fact that Norwegians are getting richer thanks to low unemployment and a robust economy. Analysts expect prices and rents to continue to increase throughout 2013. For more on this continue reading the following article from Global Property Guide.

Is Norway in a housing bubble?  Robert Shiller thinks so.  The International Monetary Fund’s research has suggested that Norwegian house prices may be 15% to 20% overvalued.   Yet Norway’s house price rises are still going strong.  Norway’s house price index was up 6.7% during 2012 (5.4% when adjusted for inflation), according to Statistics Norway.

Why so?  Because Norwegians are getting richer by the day.  Norway’s strong economy is predicted to expand by 2.8% in 2013.  Wages are expected to rise by around 3.9% in 2013, and 4.6% in 2014. Unemployment is only 3.5%, and inflation was 1.3% in January 2013.

Oslo’s price index rose 8.3% (7% real) during 2012.  True, it dropped 1.3% (-2.5% real) during the latest quarter.  In fact, overall, during the latest quarter, Norway’s house price index fell by 0.7% (-1.9% real).

Yet the annual pattern looks pretty healthy:

  • Trondheim’s house price index was up 7.9% during the year (6.6% real);
  • Stavanger’s house price index was 7.2% (5.9% real)
  • Bergen’s house price index was up  5.3% (4% real).

Of Norway’s regions, Akershus excluding Bærum had the highest annual price growth at 8.4%, while Western Norway excluding Bergen had the lowest growth, at 3.8%.

House price rises are expected to continue in 2013, due to low interest rates and income growth.  Statistics Norway estimates a rise of 6.8% in house prices in 2013, with 6.2% price rises in 2014, and 5.9% in 2015.

Interest rate cuts should help.  Following the global credit crunch there were interest rate cuts, though from late 2009 to 2011 Norges Bank hiked rates to check inflation.  But in December 2011, the euro crisis prompted the central bank to ease its key policy rate again by 50 basis points to 1.75%. The rate is still at 1.5% as of January 2013.

House price cycles

Norway is no stranger to rapid house price increases. Since 1990, house prices have risen by more than 10% annually during six different periods:

  • Q1 1994 – Q4 1994: average y-o-y growth of 13.3% (11.7% in real terms)
  • Q4 1996 – Q3 1998: 12% (9.4%)
  • Q3 1999 – Q3 2000: 16.8% (13.7%)
  • Q2 2004 – Q4 2004: 10.4% (9.2%)
  • Q1 2006 – Q3 2007: 14% (12.4%)
  • Q4 2009 – Q1 2010: 11.2% (8.9%)

Two major causes of these strong house price increases:

  • strong economic growth
  • low interest rates

Annual price falls were observed only in three periods:

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  • Q1 1993 – Q2 1993: -3.2% (-5.6% in inflation adjusted-terms)
  • Q2 2003: -1% (-3.2%)
  • Q3 2008 – Q2 2009: -4% (-7.2%)

The average price of new detached houses in Oslo rose 171% between 2001 to 2011, to NOK 42,799 (€5,815) per sq. m.. In contrast, new detached house prices rose only 108% in Norway as a whole.

Lower interest rates again

Norway’s key interest rates have gone through several cuts and hikes since the global credit crunch. From 5.78% in Q3 2008 sight deposit rates were slashed to a record low of 1.25% in Q3 2009. Mortgage interest rates dropped by as much as 4 percentage points, to 3.4%-3.8% in Q3 2009.

Interest rates were pushed up by 1% to 2.25% in May 2011. Norges Bank claimed the hike aimed at ‘currently low’ inflation, but with core inflation only 1% in May 2011, down from 1.3% in April, this seemed unlikely (the strong Norwegian Krone keeps prices in check). The rate hikes were more likely targeted at avoiding a housing bubble, since the housing market is extremely sensitive to interest rate changes.

In December 2011 Norges Bank eased its key policy rate to 1.75% to match the ECB’s key rate cuts in November and December 2011, and in response to weaker growth in the euro area, according to Deputy Governor Jan F. Qvigstad – the rate cut aims “to guard against an economic setback and even lower inflation”.  The rate was moved down again and stayed at 1.5% for three consecutive quarters to Q4 2012. In its regular meeting last December, the central bank decided to retain the key rate at 1.5%.

Banks offered mortgages at around 4.26% in Q3 2012; mortgage companies charge 3.92%. Most mortgages are issued by banks (48.1%) and mortgage companies (47.1%).

Mortgages have risen to 69% of GDP in 2011, from 40% of GDP in 2000. Household gross domestic debt grew by 5.2% in 2012, to NOK 2.38 trillion (€ 320.1 billion), around 80% of Norway’s GDP.

Increased construction activity

There is no massive housing oversupply in Norway.  The increase in dwellings started and completed in Norway has been modest, in comparison to countries such as Ireland or Spain, despite the house price boom.

Dwelling starts averaged 23,000 units from 2000 to 2003, and rose to an annual average of 31,000 during the boom years from 2004 to 2007. They fell to 21,000 units annually from 2008 to 2010. In 2011, housing starts were 27,507 units.  The number of dwellings completed followed a similar pattern.

Rent have increased in line with house prices

The Global Property Guide does not produce to date rents and yields statistics for Norway, so it is difficult for us to assess the level of rental yields, unfortunately.   However rents have been rising only in line with prices,  which suggests that fears of over-valuation are exaggerated.  Normally there is a clear pattern to housing bubbles, with house price rises greatly outpacing rent rises during the boom.  This has not happened in Norway.  Average monthly rents rose 5.1% during the year to Q3 2012. Rents in Oslo, including Bærum rose by 5.3%.  True, rents in Bergen, Trondheim, Stavanger and Tromsø surged by 8.7% y-o-y.  But the general pattern since 2007 has been that rent rises have kept pace with house price rises, which suggests that the situation is under control.

Owner occupancy is strongly subsidized by the state

Owner occupancy has been increasingly popular in Norway. State policy has had a strong impact:

  • Preferential interest rates are offered to households through the State Housing Bank.
  • Buyers can purchase municipal land at subsidized prices.
  • Owner-occupiers get tax relief on mortgage interest payments.
  • Owner-occupied housing is taxed at a lower effective rate than rental housing.
  • Owner-occupied dwellings are capital gains tax exempt.

The long-term impact of all these measures – in 1920, about 47% of Norway’s households were renters, but by 2011 only 23% rented, and around 62.6% were freeholders and 14.5% coop-owners. Oslo had the lowest portion of home owners at around 69% and its portion of renters was slightly higher at 30.7% of households.

At the same time, there is a consensus that the free market does not provide sufficient housing for the poor.  In 1998, the Government agreed that the state should finance a new non-commercial rental housing sector, with the aim of building 50,000 new non-commercial rental dwellings over the next 10-15 years, located in the biggest towns, with low and regulated rents. Social rental housing made up around 15% of the 800,785 rental stock in 2001.

Proactive housing policy in 2013

In 2013, the government plans to implement a pro-active housing policy. This year, around NOK 24 billion will be set aside by the government to loans and subsidies for various housing measures and housing support, according to Liv Signe Navarsete, Minister of Local Government and Regional Development.

According to the Ministry of Local Government and Regional Development, additional funds were also allocated to the following:

  • Subsidies for establishing home ownership will be up by NOK 30 million to 354.3 million.
  • Subsidies for home adaptation will be raised by NOK 47.5 million to NOK 172.5 million.
  • Subsidies for rental homes will be increased by NOK 58.6 million to NOK 488.6 million.

The Norwegian State Housing Bank lending limit will be increased to NOK 20 billion in 2013.

Robust economic growth continues

Norway’s large petroleum industry, combined with soaring oil prices, has kept the economy vibrant.  Norway is the world’s seventh largest oil exporter and second largest gas exporter.

Since 1990, Norway has only experienced one year of recession (2009), when it contracted by 1.6%. Norway’s economic growth averaged 5% between 1994 and 1997. Even during the economic slowdown of 2002 and 2003, economic growth was maintained, with annual GDP increases of not less than 1%. Later, high oil prices pushed growth to an average of 3% between 2004 and 2007.

Norway’s GDP will expand by 2.8% this year through high petroleum investments and low interest rates, according to Statistics Norway – slower than growth of 3.1% in 2012, but higher than in 2011 (1.2%) and in 2010 (0.5%).

Unemployment was at 3.1% in 2012 and is expected to slightly increase to 3.2% in 2013, according to Statistics Norway. The economic upturn is expected to boost employment in 2013.

Inflation in January 2013 was 1.3%, way below the central bank’s target of 2.5%.  Norway is not a member of the European Union or euro zone, and is free to set its own fiscal and monetary policies.

This article was republished with permission from Global Property Guide.


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