Wednesday, October 30, 2013

Norges Bank Prepares Public For Downward Reaction In House Prices

Central bank governor Øystein Olsen in a Bloomberg interview:
Olsen signaled the bank is ready to tolerate sustained house price declines in response to Norway’s financial imbalances. The public should be “prepared” for a “downward reaction” in house prices, he said.
“It’s important to realize, especially for households, there could be a reaction downwards in prices over a longer period without the economy entering into a recession,” Olsen said. “Even a drop on a yearly basis on house prices doesn’t have to spur any chain of negative impulses throughout the Norwegian economy.”
I must say I experienced a relatively strong déjà vu feeling, being familiar with what Ben Bernanke and other Fed governors thought about the U.S. housing market in 2006-2007 (for instance, see here and here). I naturally appreciate (surprise, surprise...) the tough stance Olsen takes against further house price and mortgage growth, evident in his comment from the same interview:

“We’ll be concerned if housing prices and debt levels continue to grow. It doesn’t have to be a concern with a moderate downward reaction in housing prices.”

I already expressed my concern with this in a post on March 17, 2013: "As far as I know, the authorities around the world have always been several steps behind in these situations. To me it makes sense that since it's so hard to tell a bubble (otherwise we wouldn't have them), at the time the authorities are confident enough to take tough actions the bubble is already too apparent, and so the actions from authorities serve rather as a pin to burst the bubble. In trying to be counter-cyclical, the authorities many times end up being pro-cyclical."

The big question is: What will happen to the economy when a people with a debt to disposable income ratio of over 200 % faces a "sustained house price decline" after an all-time housing bonanza? It might be that we don't need to wait for that long to find out. Meanwhile, we'd better pray that slowing oil sector - not to mention oil price - won't give us a "double whammy".

Monday, October 28, 2013

Public Service To Public Employees

Dagens Næringsliv writes today about the Norwegian Public Service Pension Fund's (Statens pensjonskasse, SPK) mortgage offering for the members of the fund. There are around 500 000 members (10 % of Norwegian population) who all have access to a mortgage rate of 2,227 % which is 1-1,5 percentage points below what private banks are offering. Whole 83 % of the loans SPK has extended are refinanced mortgages originally from private banks, and SPK lending has grown by 47,2 % during the last year.

I'm sure there is a perfectly good explanation for this, but I can't avoid the feeling that something might be wrong here?

I googled a bit. When you search for "statens pensjonskasse", the top search result links directly to their mortgage page, not the start page (which comes as second). Funny? There it says that the maximum loan amount per member is around $290 000, and twice that if there are two members in a household. So there's a limit, which is good - but you can top that loan with a loan from a private bank. You only get loan worth 80 % of the market value, so you have to come up with the 20 % yourself - at least I hope so, but I wouldn't be too surprised if there are ways around this (the comments field is open for people who might know something about Husbanken?).

I'm not an expert in political life, but I would assume that this is a way to reward the public employees while keeping their base salary in check? What I don't fully get is
  • why the state is inflating the housing bubble through this measure while trying to restrict the bubble by raising the equity requirement in private bank loans from 10 % to 15 % and setting a higher risk-weighting for mortgages in private banks?
  • why the equity requirement (20 %) is higher than the one the state wants private banks to apply, leading to a higher hurdle for employees with more limited means?

If I was a public employee with 15 % of equity on my savings account, I would ask why I should go to a private bank and pay 3,7 % interest or more, while my colleague with 20 % of equity gets 2,227 %. But I'm not. That's why I just ask: Wouldn't it be better that the public employees would all get a raise and  go to the private market when they need a mortgage?

Wednesday, October 16, 2013

Deposit Insurance Doesn't Cover The Market Value of Your Home

One often hears that paying back a mortgage is a form of saving. And I won't argue against that. What I will argue is that it's far from the same thing as putting your money on a savings account, a mistake which many people seem to make when they analyse the costs related to renting vs. buying.

Again, it helps to understand this if you see that it's possible that house prices will one day decline. Yes, you save by reducing your debt to the bank. And after each payment, you might think that you now own a slightly bigger portion of your own home, and that it's the home where your savings go - like into a huge piggy bank. But it's a piggy bank you one day might find empty, reminding you of the time when your big brother was badly in need of some cash.

Many people accept the rule that you should not see your home as an investment, and you should not look at the market price and calculate how much "profit" you have made. You anyway have to live somewhere, so it's hard to take any profits out, given that you're not willing to start renting. So if you have bought your house for $300,000 and now the market price is somewhere at $400,000, you should not conclude that your net worth / savings have increased by $100,000. The market price might not be at that level when you're going to sell, or your next home might cost $600,000 whereas the price of the same dwelling was $450,000 when you bought your first home. So you might actually be worse off because of the overall price increase in the market. In that case it's hard to see how your savings would have increased due to the increase in the market value of your home?

If this is so, then surely the same logic has to apply to your oversized piggy bank? It would mean that its financial value to you is not connected to the market value in any straightforward way. And this is why you should look at your mortgage amortization rather as honoring the promise to pay the bank the borrowed sum in full, and keep that balance separated from your savings balance. After all, when the market value of the house equals the amount you still owe to the bank - which was reality for many Norwegians last time in early 1990s - your piggy bank is empty.

It's good to have savings when the rainy day arrives. But when dark clouds start hovering over Norwegian housing market, the savings you thought you had in your house might not be there.

Monday, October 14, 2013

Two Nobel Prize Laureates Have "Seen It Coming"

If the Norwegian housing market turns out to be a bubble, we're not able to say "No one saw this coming!". Not just one, but, as of today, two Nobel Memorial Prize laureates in Economics have warned that from what they have seen, it looks like there is a housing bubble in Norway! (As far as I know, no one has asked the other laureates what they think...)

Robert Shiller, who got his Nobel Prize today, expressed his concern already one year ago.

In May this year it was Vernon Smith's turn to warn Norwegians about a housing bubble while on a lecturing tour at University of Oslo.

What makes this even more serious is that these gentlemen have devoted much of their time to studying bubbles and market mechanisms that lead to bubbles. So we're not talking about opinions expressed outside their domain - these are some of the foremost "bubble experts" in the world. It's not like Paul Krugman sharing his opinion on the Scandinavian snus (tobacco) producers' finances.

Come on, Torbjørn Eika and Jan Ludvig Andreassen! Can't you even admit that it could be a bubble?

Wednesday, October 2, 2013

Warning To First-Time Home Buyers

There are a lot of smart, young people out there who are finishing their studies, starting in their first jobs - and buying their first apartments. Buying your first apartment as soon as you have a salary slip to show to the bank is an important ritual, especially in Norway. Like I mentioned in my recent post, only students and other people who can't afford to buy are thought to be on the rental market. It's always smart to buy. Why would you pay back someone else's mortgage? Real estate is a safe and sound investment.

This is something that very few young people question nowadays. And I don't blame them for that. Their parents don't question it, having lived through the 20-year (so far) bull market in house prices. The Norwegian media doesn't question it - neither do most of the experts they interview. And neither do the politicians question it: the new government wants to reduce the 15 % equity requirement connected to purchases, just to help first-time buyers to get on the market.

But if you are one of these young people, I want you to think of the following.

First: If you rent, most of the money you pay to your landlord goes to pay the interest on her mortgage and the monthly common costs - exactly the same costs you would pay as the owner of the apartment. In many cases this can be close to 70-80 % already, perhaps 90 % at extremes, as the rental prices have not been following the overall house price appreciation.

Second: If - and no one in their right mind can deny the possibility - there is a price decline in real estate in the coming years, you might very well be a lot better off by waiting, renting and saving equity for the future purchase. In the worst case scenario, where house prices would decline by 30-50 %, you would be making the costliest economic decision of your life by rushing to buy now. So the 15 % equity requirement might be there also to protect you. And the people who say they want your best by taking it down might actually end up hurting you. This includes people like Erna Solberg and Christian Dreyer who say they are concerned about you not getting on the market. I consider them idiots for saying that, and it makes me really angry when I see this nonsense repeated time after time in the media. The whole idea of helping people to buy is based on the assumption that house prices will keep on rising significantly while young people are renting and saving for their first home. This is so 1995-2012. It's not the case anymore. You can afford to wait. In addition, house price bubbles are made of this shit - helping people to buy. It happened in the US around 2000-2006, and a lot of the people who were "helped" to buy actually got hurt.

Third: A possible house price bubble will hurt the first-time buyers the most, always. Not just have the older generations "robbed" you by awarding themselves generous pension plans that you're going to pay. They are trying to rob you - and most probably have already succeeded - by selling their overpriced homes to you, having themselves bought them cheap decades ago.

Fourth: If you can overcome the stigma related to renting (you need to be strong), you should be able to look at all the positive things that come with renting. Possibilities to test different parts of the city before settling down. Freedom to move abroad on a whim and not look back. And no financial risk if something goes wrong with the house.

I'm living in a rental apartment and saving for my own first home. And I'm concerned about you. Not because you might buy, but because you are not getting the balanced advice you deserve. Because all these more experienced people are taking the risk that they might actually end up hurting you.

Sometimes it's smart to rent. If you agree, why not give it a try - you have very little to lose.



I will continue my list of "idiots" after reading this article:

Michael Tetzschner, Christian Tybring-Gjedde, Ola Elvestuen, Hans Olav Syvertsen, Peter Batta, and once again, Christian Dreyer. I find this disgraceful, politicians teaming up with real estate agents to help people with limited means buy homes so that there would be no "class differences". This brings to my mind the infamous case from the US where Mexican strawberry pickers got to buy a house for $720,000...

If the government really wants to help first-time buyers, it should fund a building program - lower prices, not bigger loans, are what these young people need. There is of course a big risk that this would deflate the bubble and lead to a recession... So better keep on granting bigger and bigger loans and hope the bubble will never burst? Unfortunately it will always burst in the end.



“I don’t think that we have too large of a private debt problem in Norway but we will create tax relief on savings,” Erna Solberg, leader of the Conservative Party and incoming prime minister after winning the Sept. 9 election, said yesterday in an interview after agreeing to form a minority government with the anti-tax Progress Party. “The policy will be to get more people saving for the future.”

Thank you, Erna! 

Tuesday, October 1, 2013

Mainstream Media Spread News About House Price Decline

It has been a busy day for Norwegian media. Stories about the new minority government (revealed last night) have naturally taken most of the space, but throughout media there has been another fairly big story: House prices are declining. (see for instance here, here and here) The amount of coverage suggests that this will probably have a real effect on the market. There will surely be follow-up coverage in the coming weeks and months (experts speaking for, and against, a price correction) which will reach the audience even better than today.

The narrative has changed totally in such a short period. There is no more easy money to be made. And there's more and more stories about declining rental prices in face of oversupply. Just wait until some investors get in a hurry to sell at the top, like I mentioned in March.

There was another top story: Olav Nils Sunde, a shipping magnate, has bought a 1187 square meter apartment in Tjuvholmen, Oslo, paying a record $33,200 per sq m, for a total price of $39,400,000! Time will tell, but he has a chance of becoming a legend by marking the top of the 20-year bull market in Norwegian house prices.

Today's "No reason to panic" explanation for price decline came from Christian Dreyer of EFF (a national agency for real estate agents): He says (in my own words) that prices are not going down because of reduced demand but because of increased supply, in other words the market is functioning well.

Whatever is the reason, it's good to remember what is the most relevant indicator for future price increases: recent price increases.

(I believe I'm quoting perhaps the foremost expert on housing bubbles in the world, Robert Shiller, but I can't find the source at the moment - please see his great article on house prices here)


In case someone missed this last year, Robert Shiller has had a look at Norwegian house prices:

Robert Shiller, professor of economics at Yale University and co-creator of the S&P/Case-Shiller home-price index said that the Norwegian government "should start worrying now."
"This is a reason to expect an unpleasant end to this bubble in Norway. That is what I told them then, " Shiller told CNBC on Tuesday, alluding to a presentation he made in the Scandinavian capitals of Oslo, Copenhagen, and Stockholm in January in which he warned of the impending housing bust.
Rather than learning from its European neighbor Spain — where a real estate bubble saw home prices rise 44 percent from 2004 to 2008 before the bubble burst, leaving not only eerily empty properties and Spanish ghost towns , but domestic banks with billions of bad loans — Norway is letting its economic success go to its head, Shiller said.
"My suspicions are Norwegians are infected with a success story for their own country that makes high home price increases seem plausible to them, " a success only aggrandized when compared to its economically ailing euro zone neighbors, he said.
"They feel smug in their superiority with regard to the European crisis. They didn't even join the EU, let alone the euro. They don't have to bail out any irresponsible southern countries, " Siller said. "They have North Sea oil . They have low unemployment . [In short] they are doing everything right, and lots of people want to come to Norway."
However, Shiller notes that there is a paradox in the Norwegian success story.
"Norway is just about the last country to expect a housing bubble to appear, at least not a rational bubble, since it has so much empty land, " he said. "If home prices get elevated, there should be a prompt supply response, new houses will be built, bringing prices down, unless there is some kind of political or zoning problem. Even such political problems tend not to last forever. "