Wednesday, May 1, 2013

Norway Is Not Alone

Norway is in a league of its own. Norway is special. Norway is lucky, for sure, but that luck is here to stay. It's the oil, stupid? We are all special - at least according to our mothers. And it's natural to find the explanation in the differences: "Yes, to an outsider it might look like a bubble, but...". But let's forget the differences for a while and take a look around the world.

Could it be that the biggest reasons for high house prices in Norway are similar to what other countries are experiencing around the world? Could it be that Norway is not that different after all?

New Zealand (with a population of 4,4 million) has fared well thanks to Chinese growth and, hence, the strength of Australian economy. This is what they write about the housing market there:

* RBNZ [central bank] sweating on housing bubble as prices hit records
* RBNZ mulls bank lending restrictions
* Rate hikes might be needed but would fuel soaring kiwi
* Loose global monetary policy pours capital into NZ
Sounds familiar? Can't raise interest rates because of the strength of the currency: check. Loose global monetary policy is the culprit: check. Bank lending restrictions: check. Central bank sweating on housing bubble: check. Prices hit records: check.

Canada, in many ways in a similar situation to Norway, having experienced a commodity-led economic boom, is seeing the housing market turn as we speak:
Mr. Carney said rapidly rising prices experienced in Canada over the past decade are “certainly not normal” and Canadians shouldn't count on home prices to be their main source of wealth gains.
“Real wealth is built through innovation, and it’s gained through hard work,” Mr. Carney explained in an interview taped before this weekend’s G20 finance ministers and central bankers meeting in Moscow. “It’s not through some magical asset inflation.”
Canada’s housing market has been slowing since mid-2012. Housing starts and homes sales have come down, while prices appear to have peaked in many once-booming markets, such as Vancouver.
Canadians are continuing to add to their record debt levels – mainly through home mortgages and lines of credit – but the rate of increase has slowed substantially.
Ottawa has tightened mortgage rules several times since 2008 to cool the market. But interest rates still remain at rock-bottom levels, as do borrowing costs.
And talking about the "Dutch Disease", it might be useful to look to the Netherlands in search for a possible future scenario for Norway:
Private homebuyers, for example, could easily find banks to finance more than 100 percent of a property's price. "You could readily obtain a loan for five times your annual salary," says Scheepens, "and all that without a cent of equity." This was only possible because property owners were able to fully deduct mortgage interest from their taxes.
Instead of paying off the loans, borrowers normally put some of the money into an investment fund, month after month, hoping for a profit. The money was to be used eventually to pay off the loan, at least in part. But it quickly became customary to expect the value of a given property to increase substantially. Many Dutch savers expected that the resale of their homes would generate enough money to pay off the loans, along with a healthy profit.
More than a decade ago, the Dutch central bank recognized the dangers of this euphoria, but its warnings went unheeded. Only last year did the new government, under conservative-liberal Prime Minister Mark Rutte, amend the generous tax loopholes, which gradually began to expire in January. But now it's almost too late. No nation in the euro zone is as deeply in debt as the Netherlands, where banks have a total of about €650 billion in mortgage loans on their books.
Consumer debt amounts to about 250 percent of available income. By comparison, in 2011 even the Spaniards only reached a debt ratio of 125 percent.
I'm sure we are all aware of the dire situation in Denmark and the talk about curbing lending in Sweden, so I don't need to go there.

In the end, it's all about loose global monetary policy and exchange rates. Like I've mentioned earlier, when countries like the US and Japan need to keep rates low and use unconventional measures (QE) to loosen the monetary policy even more, it has a big effect on countries like New Zealand, Canada and Norway, countries who have fared better than the US so far. You can call it "collateral damage" and rest assured that Messrs. Greenspan and Bernanke don't care about it. You have to save yourself.

I have an action for you today: Google "norwegian housing bubble" and have a look at the results. Isn't it a bit alarming that so many people around the world find the housing market of a country of 5 million people so interesting that they want to write about it, and not just that, but think that their readers find it interesting too? They are probably not aware of the peculiarities and strength of the Norwegian economy, so they find it amusing how a bubble of these proportions can go unnoticed by the home buyers and authorities, especially given that we all should know better after what has happened around the world during the last six years.