Saturday, March 9, 2013

The First Concrete Sign Of The Trouble Ahead?

First, I want to sincerely thank those of you who have given me feedback in recent weeks. Being realistic (some call it pessimism) is a heavy duty, and you need a break now and then. I'm happy to say that I'm back in business and full of realism ;-) Since my last post, there has been some interesting developments on many of the points I have brought up, and I can't wait to write about it. But I want to start with what I view as possibly one of the first real signs of the trouble ahead. As always, if you don't agree (or have something to add), feel free to share your views in the comments.

On February 16th, the " of Norway",, wrote about a downward pressure on rental prices in Oslo (Google Translate helps if your Norwegian is not yet strong enough). In brief: Nikolaos Farmakis, who has been interviewed for the article, works for a well-established rental broker Utleiemegleren. He tells about a case where he expects to be forced to lower the rental price by 20% for an apartment situated in one of the most popular neighbourhoods in Oslo when the apartment comes back to the market in April. This anecdote is supported by a study by Opinion Perduco showing that rental prices flattened out during Q4/2012 and that more prices are lowered than increased when looking at the price adjustments taking place on the leading rental website Farmakis also talks about the unrealistic rental price expectations of private, non-professional investors who are new to the market, causing some heated discussions between the broker and the house owner, and ending up in a disappointment for the investor.

To me it seems that there might be a worrying development underlying this downward pressure in rental prices.

If you combine a) the current, almost incredibly strong trust in increasing house prices among Norwegians with b) the easy access to credit and c) the fairly low return (although I'm very satisfied with the 3,7% I currently get) on savings accounts, you could expect that many households with extra savings (a rarity in these times) would be willing to become rentiers? This article is a prime example of what I'm talking about. Professional, experienced investors must have noticed that the return on rental investment is currently very low ( recently wrote about how it makes more and more economic sense to rent instead of buying a home, and the article above has a calculation that shows you get more on savings account "risk-free" than you get by renting out an apartment), so I assume the main motivator for these investments must be the "total return", i.e. rent + expected increase in value over time. Some of these amateur rentiers might be counting on finding - a couple of years down the road - the famous "Greater Fool" who will offer them more than they paid, or then they just sincerely think that the prices will always appreciate.

There are at least two direct consequences for this kind of speculation that are already in effect:

  1. These "second house" investors have increased demand for - and thus prices of - apartments on the already hot market.
  2. They also reduce the supply of houses/apartments to own, and this increases prices when practically everybody wants to own, not rent.
What these two articles and the study might very well show is that we may already face the further consequences:
  1. Speculation leads to oversupply of rental apartments while there has not been corresponding increase in demand for rentals.
  2. This leads first to downward pressure in rental prices and, through lowered return for rentier, it eventually increases the supply of dwellings for sale when it makes less and less sense to rent out instead of selling and cashing in the value increase of previous years.
  3. The supply of dwellings for sale increases while lower rents cause more people to rent instead of buying, leading to cooling house prices.
Makes sense? To me this kind of mismatch between rental prices and house prices is a classic sign that something is wrong in the market.


  1. I couldn't agree more! There are more houses for rent in Oslo than for sale. There will definitely be some disappointed housing investors (read: speculators) in the coming months - not getting all the easy money they thought they would get.

  2. If you are not familiar with Den Store Norske Boligboblen, I suggest you check it out. Written by researchers at Frischsenteret at University of Oslo.