Tuesday, October 7, 2014

Just The Sentiment?

It seems my "summer holiday" gets longer and longer with every passing year... Perhaps my habits would fit better book-writing than blogging? Well, here we go.

Where are we today, and where did we come from? When I look at the past ~15 months in the Norwegian housing market, and the economy in general, what catches my eye is an interesting interplay between fundamentals and sentiment. It's actually hard not to see a fair dose of irony in it. Let me tell you what I mean.

Last autumn, when home prices were in decline and "It's a bubble!" folks were already practising their I-told-you-so's, Statistics Norway and some other market commentators were telling us how the price fall was driven by weak sentiment, or market psychology. According to them, people had taken an irrationally negative view on the housing market, but the effect of this would be short-lived as the fundamentals (e.g. GDP and income growth, employment) remained strong. Back then, I argued that this is not true, that the fundamentals are widely expected to weaken, with investment flattening out and growth slowing, and it's these expectations that should, and do, affect the market. Well, I haven't changed my mind since, but the panic in the housing market did end up being fairly short-lived, just like these commentators were suggesting.

Now, in autumn 2014, these "It's just the sentiment" commentators are increasingly facing a dilemma:

The fundamentals are weakening (just like many expected in 2013) and, as of late, strikingly so. Oil-related investments could be reduced by 10-15 % in 2015 if we are to believe the consensus (no talk of flattening out here...), and these expectations have mostly been formed before last week's sharp drop in oil price. The financial media in Norway is full of reports of oil (service) companies cutting workforce and analysts telling how the Oil Age is over, at least for now. And if this isn't gloomy enough, the EU (destination for ~80 % of Norwegian exports) is again teetering on the brink of a recession. Meanwhile, the sentiment on the housing market seems to be fairly strong, with year-on-year price growth around 3,6 %. The astounding certainty over positive home price development, a certainty which was hurt in late 2013, seems to be fully re-established.

So, how is it this time - should we expect the sentiment to catch up with the fundamentals? Is it now irrational to believe, like many still do, that one should buy an apartment even when it's only for the duration of a three-year study? Is it likewise irrational to think that home prices are prevented from falling by high population growth, when population growth (net migration) has been so closely correlated with the growth in oil investments (and jobs) in 2000-2014?