Sunday, November 3, 2013

An Answer To Christian Vammervold Dreyer

Christian V. Dreyer, the leader of an association for Norwegian real estate brokers (EFF), writes in his latest blog post about the falling house prices. He himself has worked as a real estate broker/agent in the past. Now, is there any sense in arguing with a real estate broker about a housing bubble? After all, Dreyer and EFF are not hiding their agenda, which is to work for the benefit of real estate brokers. Real estate brokers usually lose jobs if house prices drop in any significant way. House prices can drop in a significant way if the majority of people expect them to do so. Dreyer and EFF thus have all the reason to tell people that house prices will not drop in any significant way and so it's safe to buy.

I write this post for two reasons. One is that Christian Dreyer is presented as an expert even by the financial media in Norway, and so gets his message through to people. The other reason is that many other experts, or "experts", are using arguments similar to Dreyer. It's like the whole country is full of real estate brokers? Perhaps that's what you get when over 80 % own the house they live in and are lured by the "wealth effect" of ever rising prices.

An Answer To Christian V. Dreyer

In his post Dreyer first goes through some reasons for the current price decline:

  1. Strong and sustained house price increases which have lead to high household indebtness.
  2. Higher bank capital requirements set by the authorities.
  3. Increased inventory of dwellings for sale, due to slower demand and a glut of finished new home projects where speculators/"flippers" (!) want to sell and people moving in sell their old homes.
  4. First-time buyers having difficulties with entering the market (due to high prices and increased equity requirement, I assume).

I mostly agree with these, so I won't go through them in more detail. It's nice that we can agree on something. But then comes the conclusion. Dreyer argues that the above-mentioned factors have led to the media taking a negative view on the housing market, and this media coverage and the effect it has on sentiment are the real culprit behind the price decline. Sure, psychology is an important driver of the market, like I have mentioned on many occasions. But I don't understand why Dreyer goes through all these more fundamental reasons for the decline only to say that in the end it comes to sentiment (psychology), while at the same time he admits that this change in sentiment is a result of the more fundamental factors he just presented?

Or perhaps I understand. After having put all the blame on sentiment, he goes on to argue that the strong fundamentals of Norwegian economy will in the end win over the negative sentiment. There has never been more people at work in Norway, never have we had more purchasing power. Low interest rates, low investment in new housing and low unemployment, he argues, will make sure that the prices will soon rise again.

So, no matter how high the prices have got, they are safe from a significant decline because of strong economic fundamentals? The problem is that bubbles are never formed when the economic fundamentals are weak. Currently strong fundamentals can never be an argument against a bubble that can burst in the near future. Quite the opposite, you get a bubble when the absolute majority of people think like Dreyer thinks - that this can't be a bubble. And that happens when the fundamentals are at their strongest and the future at its rosiest, just when the Dreyers of this country think that nothing can go wrong.

What Dreyer also forgets here is that sentiment affects fundamentals, just as well as fundamentals affect sentiment. A positive feedback loop between sentiment and fundamentals has taken us to where we are in Norway today. But you can't have the cake and eat it too. So when the sentiment turns more and more negative as it has done now (and this is not just true about house prices but also about the economy), it will start to affect the fundamentals as well. Anyone with a basic understanding of bubbles should know this.

My conclusion is that Dreyer has no valid arguments when it comes to the question of if this is a bubble that has started to burst or not. At best, he manages to present many facts that actually speak for a bubble.


  1. Yes, price expectations affect demand for housing. If people expect house prices to decline then this will reduce demand and vice versa, particularly in the investor class. It shouldn't be that hard to understand! With such high leverage in the household sector changes in the interest rate have larger affects on disposable income.
    There might be a silver lining to the bursting of the housing bubble here in Norway in that it will reduce demand in the economy and thus inflation, so likelihood is that the central bank will be able to reduce interest rates further should this happen. With the global economy improving and increasing interest rates outside of Norway this will put a lot of downward pressure on the NOK, which is desirable as wage costs in Norway are significantly higher and will help the non oil sector. This is the great benefit of having our own currency, and not tied to the Euro for example.
    I would recommend investing in funds that are denominated in different currencies, UK or US investment trusts might be an ok bet.
    I would hope that the government has a list of 'shovel ready' infrastructure projects to use should things get substantially worse. we shall see!

  2. Here's another piece by Nobel Laureate Robert J. Shiller -

    In essence this previous surge in mortgage lending will eventually lead to bad debt and subsequently not enough positive debt liquidity on the market.. this same neo classical economics has led financial systems to 2008 Global Crisis.

    We have yet to see regulations on these products..