Friday, December 12, 2014

Norges Bank Not Worried About Rising Home Prices

I actually think Norges Bank is factoring in a very high probability for a recession in 2015 (Olsen basically said it out loud, "severe downturn"), so I don't understand the current fuzz about higher home prices and Norges Bank having abandoned their push for lower household credit growth. They must think that they will get lower credit growth anyway, and the rate cut is actually aimed at softening the expected fall in lending to businesses and households.

The Norwegian Krone has already fallen so much, so fast, that I don't see this 0.25 per cent cut had that much to do with lowering the exchange rate. From any non-short-term exchange rate point-of-view, it didn't really matter if they cut now or in March 2015. Had they not cut now, it would have been more likely that they cut 0.5 per cent in March. That would have been, at least partly, reflected in market expectations.

The timing of the rate cut matters much more for private sector credit growth, and this cut is about conveying a message of looser monetary policy to that sector, to keep the credit growth from following the outside temperature too closely now that winter is coming (it's +1 degrees in Oslo today...).

It's time to wake up to reality: Norges Bank is not anymore worried about rising home prices. If anything, they are worried about falling lending -- both demand and supply-driven-- to businesses and households, and eventually falling home prices.

As Keynes knew, "animal spirits" play a much bigger role in business investment decisions than any interest rate changes Norges Bank is able to create from an already low level. So we can expect that household lending is the area that is affected the most by this rate cut. But really, do they believe such a small cut would offset the effect of negative psychology, witnessed in steeply falling consumer expectations (in Norwegian, but see graph)? I think we are seeing here again the mental model many Norwegian economists have managed to build in their heads: Home prices just can't fall.

Thursday, December 11, 2014

Norges Bank Trying To Stay Ahead Of The Curve

Norges Bank unexpectedly cut its "steering rate" today from 1,50 % to 1,25 %. It stated the following as a justification for its decision which somewhat surprised the markets (via Richard Milne -- @rmilneNordic -- at

“Growth prospects for the Norwegian economy have weakened. Activity in the petroleum industry is softening and the sharp fall in oil prices is likely to amplify this tendency. This will have spillover effects on the wider economy and unemployment may edge up ahead. At the same time, the krone has depreciated markedly, which is helping to dampen the effects on the Norwegian economy and underpin inflation.”

Some economists and other pundits, Øystein Dørum of DNB Markets and Atle Willems of EcPoFi among them, have argued that this is "wrong kind of medicine", as they expect that it might lead to increased lending to households, and higher home prices. Of all the people, I should find myself in agreement with them. And I can't say that I strongly disagree. I just don't think it's as simple as that.

I believe there's a good chance that Norges Bank is much more worried about the economy than most of us realize. One sign of this is how they today expressed their concern for the world economy:
"The upturn in the world economy remains moderate and there is considerable uncertainty surrounding developments ahead."

As of late, one of the main arguments for an expected soft landing in Norway has been the strength of world economy, a factor which, combined with a weaker Krone, is expected to help Norwegian non-oil exporters. The oil price fall has been widely interpreted as being supply-related, which would mean it would stimulate oil-importing economies. That is a dangerous over-simplification. You can never forget the demand side, and there it is expectations that matter. China, one of the main locomotives of world economy since 2008, has been slowing down for a while and this trend is expected to continue in 2015. Europe is another headache that won't go away, and it's the destination for around 80 % of Norwegian exports.

It has been suggested that today's rate cut is a sign of strong pessimism on the part of Norges Bank, and I can't but agree. To be fair, Dørum of DNB says that if credit growth would slow down substantially, then a rate cut could be the right choice. Whereas he would like to see more evidence before the cut, Norges Bank has decided to act already on the expectation of much slower credit growth. In other words, it's trying to do "whatever it takes" (please, Mr. Olsen, don't ever use those words...) to stay ahead of the curve.

I see also a human factor behind this decision. This might come as a revelation for some of the readers, but central bankers are human beings like the rest of us. To better understand what they might be thinking at Norges Bank, I suggest you read this article from the Financial Times: "Central banks: Stockholm syndrome". It shows how Sweden's Riksbank, and especially its head Stefan Ingves, has been crucified -- by Paul Krugman and the likes -- for too tight monetary policy, the aim of which was to fight credit growth and higher home prices. I do recognize that the inflation and unemployment situation is different in Norway at the moment. But so is it with GDP growth (6,6 per cent in Sweden back in 2010!) and the expectations thereof. My point is a broader one: In the current environment, the prevailing (academic) opinion -- which I disagree with -- makes it very likely that central bankers will get punished for anything that in retrospect turns out to be too tight monetary policy. This has happened to Riksbank under Ingves in 2010 and the ECB under Trichet in 2011.

 Whether we like it or not, the "easing bias", much critized by the Bank for International Settlements, is still there. But I can live with a 0,25 point cut, which I don't expect to be enough to keep the credit flowing freely to households now that the severity of the economic situation is finally dawning on the public. Should I find myself mistaken on this one later, I promise to curse today's rate cut!

UPDATE: Olsen puts it like this at Bloomberg:

“Our job now is that we need to prevent a severe downturn in the economy”

Tuesday, December 9, 2014

Norwegian Housing Market: What To Expect In 2015

The baseline scenario in my opinion is clear: I don't see any reason to rush to buy at this point. One can be fairly sure that there won't be any runaway home price inflation, which means that the upside is much more limited than the downside. If one expects interest rates to move from 3,0 % towards 2,0 %, it will make little difference if one at the same time expects home prices to drop 10-20 %. One just doesn't buy in that situation. I think the market will become a lot more price sensitive, a situation where we really haven't been save autumn last year.

"It's only the sentiment" story -- which basically relied on Norwegians looking in the mirror and seeing themselves as irrational pessimists -- worked last winter, combined with banks pushing out loans again, but now the storyline needs to change. "It's only the fundamentals" isn't as convincing, is it? Not from a homebuyer perspective, and not from a bank shareholder -- and, even tougher, creditor -- perspective. Well, DNB might be a bit different, due to its market share and high government ownership. If Rune Bjerke, this Jamie Dimon of Norway, decides that the first-time buyers should be there to support the market, and Norges Bank and Finanstilsynet either play along or get pushed aside by democratic forces (the government with voters' backing), then who knows. (Of course I exaggerate, and I'm no "conspiracy theorist", but I think there could be more than a grain of truth in this when we look at what has happened this year...) It's very hard to do any guessing regarding when the banks will need to tighten their purses, but the risk of that happening this winter can't be negligible taken into account the current economic situation and, more importantly, the expectations.

The problem with economics is that you can always build a very convincing "doomsday scenario", because there are very real feedback loops in the economy. Just a short example:

Less lending will lead to lower home prices. Lower home prices will lead to even less lending, less construction, higher unemployment, lower salaries, less consumption, again higher unemployment, lower salaries, lower home prices, less lending... (See Irving Fisher's famous "Debt-Deflation Theory")

You continue this thought exercise for long enough and you end up with Norway turning into Venezuela... something that is very unlikely to happen, either because we find a natural "equilibrium" before we reach that point, or because there will be a successful government intervention (some economists are still arguing about which one it is). You probably get a more realistic picture when you look at the history and countries around you. To expect Norway to look a bit more like Denmark, or the Netherlands, in a couple of years might be more realistic. It's painful nevertheless, as people would feel a lot poorer than they do today.

Professor Hilde C. Bjørnland, I have understood, is someone who has worked to better understand how the weakness, and -- one should never forget -- the strength, in oil sector might feed to Norwegian economy in general. How I would sum it up here (for dummies like myself) is that we shouldn't think the rest of the economy is isolated, and the public sector especially has been affected (perhaps "bloated" could be the right word here) by the oil boom -- a fact that will make it vulnerable, or less agile, when the need comes to stimulate the economy while (especially oil-related) tax income is falling fast. I stress that these are my words, and you should check her work with Leif Anders Thorsrud to form your own opinion: "Ringvirkninger: Norsk økonomi og olje", November 2013. (I couldn't find any English version, sorry).

But what is true about the possibilities for building a "doomsday scenario" is also true about the opposite, what is often called a "Goldilocks scenario". So I think it would be very naive, bordering ridiculous, to expect that the fall in oil prices, oil jobs and oil income will be offset by the stimulative effect that lower oil prices might have in oil importing economies, combined with a weaker Krone, a combination which can lead to higher exports for Norwegian non-oil businesses. First, we don't even know to how large extent the oil price is now falling because demand is falling (look at China, especially -- my favorite "culprit" when it comes to volatility in commodity prices). It's not only the supply increases that are behind this price fall, so other economies might be weakening too. But most important of all, you just can't have the cake and eat it too: In my opinion one can by all means expect the negative effect of oil price drop to be offset, but only to the extent that one believes that the effect of higher oil prices on the Norwegian economy during the least 15 years has been offset by the drag of higher prices on the oil importing economies, and the stronger Krone.

Hope for the best, plan for the worst. It's all about probabilities, not about certainties.

Full disclosure: As you know, I was quite sure that home prices would fall already in 2014. It cost me a bottle of champagne. But Baard Schumann, the CEO of one of the largest homebuilders in Norway, was fair enough to renew the bet for 2015. This means that I have again a bottle of champagne to lose or gain depending on if home prices in December 2015 will be lower than 12 months before. I don't have other similar bets ongoing, nor will I take any.