Thursday, September 26, 2013

Statistics Norway Unable To Forecast House Prices - Lacks Money

No, seriously. According to this article, Statistics Norway (SSB) has exceeded its budget (due to budget overrun in new SSB website development) and can't publish forecasts in 2013 as often as it's done before. While waiting for Torbj√łrn Eika to come out and let us know what he thinks of the house prices going forward (which he must do, as this is an eagerly anticipated report?!), I'll extend SSB a helping hand:

SSB House price forecast for 2013-2016 - September 26, 2013

A significantly weakening sentiment in the real estate market during the summer has collided with a strong increase in supply of new dwellings, causing SSB to lower its forecast for 2013-2016 house price growth. Still, in stark contrast to the growing number of fear-mongering bloggers and so called "experts" (employed by banks) who anticipate falling prices, SSB expects a healthy growth in house prices during the next three years, driven by strong Norwegian economy and low interest rates.

So the party is not over, there's still enough punch in the fridge (which was upgraded last week, btw, thanks to a "reverse mortgage") to fill the bowl and no one can take away the hard-earned wealth of the Norwegian homeowner. We call this a democratic triumph, as 83 % of us own a house and the trickle-down effects will take care of the less fortunate 17 % - this is truly a tide that lifts all the boats. Hurra! Hurra! Hurra!

Sunday, September 22, 2013

To Be or Not To Be (In The Market)

If you ask almost any Norwegian, everyone should be "in the market", i.e. own their home. To "enter the market" is the first goal of young people after they have secured a job. Only students and poor people are on the rental market. There is no place for price in this thinking, in the sense that it could very well be cheaper to rent a similar dwelling and still you just have to be on the market. Unfortunately I'm not even exaggerating, this time. Taken into account the extent to which taxation and society in Norway favors home ownership, it's hard to disagree with the masses on this. And in longer term, I don't. In shorter term, this is one of the most harmful versions of "conventional wisdom" I'm aware of.

This is what Wikipedia has to say about conventional wisdom:
Conventional wisdom is not necessarily true. Conventional wisdom is additionally often seen as an obstacle to the acceptance of newly acquired information, to introducing new theories and explanations, and therefore operates as an obstacle that must be overcome by legitimate revisionism. This is to say, that despite new information to the contrary, conventional wisdom has a property analogous to inertia that opposes the introduction of contrary belief, sometimes to the point of absurd denial of the new information set by persons strongly holding an outdated (conventional) view. This inertia is due to conventional wisdom being made of ideas that are convenient, appealing and deeply assumed by the public, who hangs on to them even as they grow outdated. The unavoidable outcome is these ideas will eventually not match reality at all, so conventional wisdom will be violently shaken until it doesn't conflict reality so blatantly.

"[I]deas that are convenient, appealing and deeply assumed by the public". Having an answer readily at hand without any need for thinking is convenient. Easy answers are also more and more appealing in a world where we face such an abundance of options, starting from how you want to have your sandwich or eggs. It's hard enough to choose the dream home, the best not just out of those available on the market but also out of the ones that might come to the market soon. It's almost impossible to spot the price bubble even if you have a master in economics, let alone if you'd have hard time explaining the word "inflation". It's not a consideration for laymen. All they can do is leave it to authorities to make sure that there will be no bubbles.

The idea that "it's always smart to buy" has very strong roots that have been strengthened along the way, not least during the last five years. If we start in 1987, the last time that Norwegian house prices crashed, how has the future treated those who bought at the top? Most of them survived and have done very well in the ensuing race to the current price level. No hard feelings there, it all ended well, and time has healed the wounds - wounds that felt no doubt a lot more real back then than they do now. So not even with these people does the story of a dangerous bubble live on.

No doubt it emerged people in 2008 who said you should wait with buying, and did so. And how wrong they were! The lesson is: "Just buy. Period." The models Statistics Norway uses are most likely heavily informed by this experience as well. Everything went wrong - oil price got decimated and financial system nearly collapsed - but house prices got only a small dent and recovered fast, and have not looked back. We are around 40-50 % above the bottom of that dip now. That's a very frightening thought, but only for people like me who think that the higher we get the bigger the fall later and the worse the consequences for Norwegian economy.

Taken into account what I write above, I understand how there are few like me. It just doesn't seem to make any sense to wait for the prices to decline. To suggest that is, if not stupid, just wishful thinking.

But none of this speaks against a bubble, does it? The conventional wisdom that it's always smart to buy is just plainly wrong as we know from history. It eventually leads to a bubble and will be violently shaken.

Saturday, September 14, 2013

A Substantial Shift

I wrote my first blog post exactly one year ago, so I think it's time for a comeback after a long (slightly longer than even the Norwegian average) summer holiday. This time I have an excuse for my radio silence: my partner in life is now an honorable, respectable woman, and we don't live in sin anymore.

I feel tempted to say that the summer of 2013 marked a turning point also in the Norwegian housing market. The coming months will prove me right or wrong, of course. But consider this:

  • The main banks (Nordea, and also DNB) see flat/negative price development in 2014 and 2015
  • Real estate agents talk about "stabilizing" market with increased supply and less bidding
  • Norwegian economy shows clear signs of slowing down and oil service industry is not expected to grow in 2014, compared with double-digit growth during last years

All this has brought us an environment where no one dares to take house price appreciation for granted anymore. Bi-annual research by Nordea (see above article) shows that while just six months ago 70 % of households expected prices to rise, in August only 32 % did so. I see a huge shift compared to just a year ago, when the general (SSB) expectations were for a 30 % price increase in the coming three years. It will be interesting to see where SSB will land in its next forecast.

Like I surely have mentioned before, SSB and the chief economists of the main banks will be among the last to tell you about falling house prices. It's just not in their interest to do so, and on top of that, they are the worst herd animals around - it's "If you're wrong and the others are right, you're out!" vs. "If you're wrong but the others are wrong too, who cares?". So it's safe to assume that they are fairly convinced of the price fall already.

When it comes to the talk about this "being good for the market, with supply finally meeting demand", I just ask: Weren't the sky high prices explained first and foremost by supply not meeting demand (see for example post about Erna Solberg, the new prime minister)? If supply finally meets demand, what will be the next thing supporting the all-time-high price level of  _____ (add here any - ANY - price per square metre)? Oil? New government? Unicorns?

Everyone has known for long that the prices are crazily high, but at the same time they have believed that there is a rational explanation, and that the prices will keep on climbing up. When all this is suddenly questioned, there will be consequences. Make no mistake about it.