Norway isn’t in the grip of a housing bubble and a shortage of supply in the property market will prevent prices from falling, said Erna Solberg, the leader of the Conservative Party and the front-runner to take over as prime minister in next year’s election.
“I argue against a housing bubble because a housing bubble is an influx of prices without demand; in Norway it’s demand that’s the biggest reason,” Solberg, 51, said yesterday in an interview in Oslo. “I don’t think house prices will fall.”
When it comes to economic bubbles, if this is the level of understanding of a possible future prime minister, what can you expect from the people in general? (I know, many of you might say that you should expect more...)
How could you ever have a housing bubble without demand? Wasn't it too strong demand that took Norwegian housing prices to a bubble heights in the 80s? Wasn't it too strong demand that took the "dotcom" share prices to ridiculous levels in the late 90s?
Speculative demand is "the usual suspect" behind economic bubbles, and I'm quite confident that when the day comes that Norwegian house prices will lose 20-40 % of their value, people will point fingers at speculative demand fed by a common and - on the surface - a coherent story adopted by majority of Norwegians: "House prices will not decline because there is a shortage of supply".
There might be a shortage of supply, but the only thing that it has to do with a housing bubble is that it is the single biggest reason why the prices have reached a "bubbling" level. "Shortage of supply" means that demand has been and is right now bigger than supply. When people assume that this will not change in the near future, they assume that this situation needs to be corrected by increasing the supply, i.e. building more, and that it will take years. They make an assumption that demand will not get lower, which would of course be the other way to solve the problem of shortage of supply.
So people keep on lifting demand by buying "second houses" (to let) because it is clear to them that the prices will not get lower any time soon, and that buying now and selling when the prices flatten out is a smart move. Eventually supply picks up (you can witness this for example in Fornebu/Snarøya in Oslo) and more houses are built just so that more people could buy a second house, until there is an oversupply of houses for rental (and remember, it's smart to buy, not rent...). Suddenly, demand is the side of the equation that moves unexpectedly lower, because it doesn't any more make sense to buy the second house. It actually makes more and more sense to sell it instead, and so the supply increases while the demand decreases.
As you see, the process above is fully possible without any steep increase in interest rates or unemployment. That's why it is impossible to predict when it is going to take place. Perhaps just expectations of higher interest rates and higher unemployment is more than enough to bring down an overheated market?