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.

1 comment:

  1. Hello Antti, I appreciate your blog, good to see some contrarian analysis. I live in Norway now, used to live in Australia. I see some similarities, in that Australia has been riding on Chinas back with huge increases in their terms of trade with the mining boom, which is now starting to unwind. Also Australia may have have even higher home prices than Norway! I was convinced prices would fall, but they have just kept going up!
    I think whatever government is in power they will not want to see any home price decline on their watch.
    On the Krone, I have been bearish on the Krone since I cam to Norway 2 years ago, it just seemed too expensive, and if any readjustment (away from oil) has to take place then it needs to fall as wages are notoriously sticky - look how difficult it has been for the peripheral EU countries (Ireland,Spain, Greece) to readjust to compete with the likes of Germany.
    On interest rates: people I spoke to seemed to believe that interest rates were inevitable going to rise soon, I was never convinced and thought it would go the way of the US and UK with lower rates for much longer than people anticipated. Long term expectations of interest rates will have a stimulatory effect on lending, especially for houses. On a 3MNOK mortgage over 30years, the difference between 3% and 6% mortgage equates to a saving of 2MNOK interest repayments.
    As for stimulating the economy in a downturn, well infrastructure is a good one, but I would hope that we reduce the corporation tax for non-oil sectors, attract businesses to set up in Norway.
    Predicting the oil price seems to be a mugs game, but from what I can gather it looks like Norway has to compete with US shale oil, so that seems to be the big question at the moment, what are the breakeven prices for US shale oil? Is it about to unwind with defaults on energy bonds (turns out the emperorer had no clothes)? Or will they improve the economics of shale oil drilling and it continue to increase supply.....