No other than the prime minister, Erna Solberg, replied to Krugman and denied the existence of a bubble. Norway is different and foreign economists don't understand it. The usual stuff.
And this time Krugman wasn't even provocative in his comments! It seems in Norway mere mentioning the word "bubble" is provocative enough? This reminds me of what Jeremy Grantham of GMO, a renowned investor, said in a Wall Street Journal interview:
"America is a very, very optimistic-biased society, as I believe, incidentally, Australia is, for whatever that means. We're the two great optimistic societies. You can have a conversation about a housing bubble in England, and they'll say, 'oh, is that right? Let me see the data.' If you have one in Australia, you have World War III! They hate you. They hate you for years! [laughs] The idea that you could suggest that they were having a housing bubble. [laughs]"
I'd say Norway compares with Australia in this matter. Overall, there's of course nothing bad in being optimistic. One could argue even the opposite. It's just that it's not really helpful if your goal is to avoid a bubble, is it?
Not surprisingly, it didn't take long until the "propaganda machine" of real estate brokers and homebuilders was lined behind the prime minister. I've got to say it amuses me how these guys, many of whose business has started to cool down and who believe in the "it's the negative sentiment, stupid" story (and continue to be proponents of the "we're not building enough" story), start tearing their hair out when faced with bubble suggestions and come out with their often weak arguments. Another clear sign of a bubble?
Guys, you can't argue against a bubble by just presenting the factors that prove that Norway is different. To argue against a bubble you need to show us how much higher price level those factors can support and that that price level is not yet exceeded. It's the price where the bubble always is. Your arguments could (and probably would) be used as well to justify a price 50 % above the current level.
The foreign economists look at indicators like price-to-rent, price-to-income and debt-to-income exactly because they don't want to get entangled in country-specific factors. You are denying the warning messages derived from these common indicators by relying on nothing else than country-specific factors. That often leads to a conclusion that "this time is different", and that's what these economists have learned to be afraid of.
So if you tell me Norway is rich, I say it's probably reflected in the price level already. Incomes are high? Debt-to-income is already around 210 %, close to world record levels. You say you're not starting to build new houses before 70 % of them are sold in advance? I say that this practice keeps the supply fairly tight, and a tight supply leads to higher prices. You think you can avoid a substantial fall in prices by keeping the supply tight? It's hard when you've contributed to the bubble with the very same practice. In addition, it's very hard to forecast the future need for housing, as work-based immigration to Norway is of cyclical nature. And forget the "people are moving into cities" argument. It's been the same in every country that has experienced a housing crash during the last 10 if not 30 years. This argument might very well have contributed to the bubble, like the bigger-than-national price decline now experienced in Oslo suggests.
In the article Erna Solberg is quoted arguing against a bubble by saying that in Norway there is one asset people put their savings in and take loans against, and it's housing. Isn't this a weakness, not a strength?
Denying a bubble outright is not smart. Being afraid of a bubble is smart. Former contributes to a bubble, the latter helps in avoiding it. So which one do you choose? Denying a bubble is of course a natural reaction from someone who is shit-scared of a bubble and thinks that negative sentiment can lead to a crash.
Let's face it. The government is obviously "very concerned with the housing market", as the outspoken new finance minister, Siv Jensen, told in October (neither denying nor confirming a bubble). This is fully in line with the concern for a bubble the previous prime minister, Jens Stoltenberg, aired already more than two years ago. So either Erna Solberg's comments were based on her private opinions, or then she is trying to calm people down. If the latter is true, we all should be worried. This is what Krugman probably referred to when he said that it's a sign of a bubble that politicians come out and say everything is OK.
I have a message to these people who use their expert -- or authoritative -- position to directly or indirectly push people to buy their first home or invest their savings in a rental apartment: If this turns out to be a bubble and there's a 20-40 % decline in the coming years, you should be ashamed. What you are telling people who are facing a big and very risky financial decision is that there's not really any risk there.