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".

1 comment:

  1. I just found your blog, and have to admit I am inclined to support your views on the Norwegian economy. I have been writing about these themes for some years now. If you have decent knowledge of the Norwegian language, you will find a lot of blogposts on my blog which cover things you write about.

    Glad to see more people with some common sense. Keep it up.