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?


  1. I would definitely buy your book.

  2. I see you have been talking about bubbly symptoms in Norwegian housing for quite some time. I was just wondering if you know something about the size of a bubble compared to the "build-up", or time interval since the last bubble? Do you think we should expect a big drop if one occurs, and/or has research confirmed/denied an effect like this?

    1. Good questions - and if we had a clear answer to those, there probably would be no bubbles.

      What we can do is measure the likelihood that this is a bubble. Bubbles are confirmed only when they pop, but what I think we can say of the current situation in Norway is that many of the signs of a bubble are there - most important of which is the high indebtness of households. We need to remember that Norway is not isolated, so what happens in the world economy is important. This will be decisive for the government's ability to soften the house price fall, and will partly dictate the size of the drop. People in Canada and New Zealand, and Australia too, are wrestling with the same thoughts as Norwegians right now. The big picture in their housing markets is the same. There has been a huge "windfall" for these countries in the 2000s, thanks mainly to the Chinese boom which is also the single most important factor behind the high oil price. People expect some kind of bust after a long boom, and for a good reason. It will always come. It's only the timing that is hard to predict.

      So there are no easy answers, unfortunately. It's all about weighing the probabilities. Research has nothing to say about the size of the drop, or if it has, I view it mostly as a "pretence of knowledge". There are very few, if any, things in economics that can be universally confirmed or denied.

      This sounds like an economist's answer, I know. Personally, I think that there is a good chance for a 20-40 % drop (steep or less steep) during the next five years, and I don't see many reasons why the prices would run away. I can't guarantee anything, of course. And I can't say when we will hit the bottom.

      I thought it would happen already this year (and there is still time), but I'm still expecting that the biggest change in the narrative in Norway will be the disappearance of "boligmangel" from it. The population growth is on its way down, has been since 2013. My understanding is that it's getting steeper as we speak, now that the oil investments are falling.

      And the narrative is what is important. No one will run to buy a home if the mortgage rate drops from 3,2 % to 2,4 % if she expects the prices to fall.

      If you're interested in some more data, you can start here:


    2. Thanks for answering, and interesting link as well. From talking to friends, I'm under the impression that Figure 4 is more or less only related to recent trends in Figure 1, or in the words of the article "they simply extrapolate recent price movements into the future." And if the prices don't keep rising, it's still better than renting is a common thought.

      On the other hand, price of housing gets its fair share of media attention, and perhaps an informed population is something that prevents or lessens the size of bubbles. I don't know if the population should be seen as more or less informed than before, but here's an interesting screenshot I took back in 2012: https://twitter.com/hakontro/status/229251222660579328
      It shows that 8 out of the 9 most read news articles at DN.no were about the housing market :)

    3. Your screenshot is very telling of the situation in Norway :)

      But does media attention translate to a more informed public? If the mass media would be writing - and people reading - about stock prices much more than it does now, would it make you more or less confident that there is no stock bubble?

      This kind of attention from the public and the media is usually considered a sign of a bubble. Especially when the coverage consists of very few pessimistic articles. There are some "doomsday prophets", but still the "rational", "reasonable" voices tell you that there is no bubble, that one should buy, not rent. (I've noticed that the majority now seems to advice against investing in rental units, though...).

      I don't think the population gets more informed by reading news about house prices. I think the overall quality of financial media in Norway is not especially high, with some exceptions of course (one of the few journalists who seems to think for himself and not just repeat "expert opinions" is Tom Staavi). If they were reading books about housing market, including something from Shiller, then I'd say they were informed :)

      I know, it's not easy to keep on renting :) Some people think you're stupid. Most of the people think that you'll lose money by not buying now. And most of the people just need to buy, however concerned they are for the prices, because that's what one is supposed to do - there's social pressure, and also a need to settle somewhere. Most of us don't have the privilege of being truly independent in this decision. But at least the ones who feel the need to buy now can do one thing: Buy cheaper (= smaller loan) than you'd buy were you not concerned about a bubble.

  3. Interesting blog, keep up the good work.

  4. I'm looking forward to your next post! So much has happened since your last one that I'm eager to see what's your view on how the housing market will develop next year. Low oil price, the economy barely growing, the NOK losing value against major currencies, and a likely base rate cut... will be interesting to see how all this factors play in the housing market. Thanks for writing!