Thursday, January 29, 2015

What Really Is Going On In Norway

In order to understand better what is going on -- and has been, for the last 15-30 years -- both in the Norwegian and global economy, I suggest you check out this blog: Clumsy Statements.

It corresponds very much with the way I view the economy. Similar "worldview" guides what I have been writing here the last two years. It explains why I think there is a private debt "bubble" in Norway and why the housing market is both the largest driver of this bubble and why this market will be the largest cause of economic trouble in the future -- likely in the near future, now that oil price has collapsed.

I always take the long view. Therefore, I find it actually quite sad that there is right now so much fuss about some temporary strength in the Norwegian housing market. If there really is strength, it is due to a simple reason. Norges Bank and Finanstilsynet seem to be done with their quest to restrict banks' lending to households, and therefore -- as there never was a lack of willing borrowers, especially first-time buyers -- new credit still flows strongly to homebuyers, or has even picked up slightly. This "U-turn" is understandable from the authorities' side, as they are worried about a coming recession. They -- rightly -- think this is not the time to restrict credit growth. They are already preparing to fuel it when needed.

Then we have the commercial banks. I can despise the lax lending decisions taken by these banks as much as I want, and I do, but I also understand how the banks' leadership positions are mostly filled with well-meaning people taken over by their professional role. They keep on lending and hope for the best. They probably see that it is anyway too late to stop now without causing a recession and big trouble for the bank(s). It would take a hero to come out and say that this cannot go on anymore, and heroes and heroines are a rare breed.

Finally, there are the households, and especially the young households. They might try to justify their decision to buy with all kinds of calculations and excuses, but buying a home is not about that. Especially in Norway -- thanks to the "Cult of Homeownership" (see this previous article for more details on the situation) -- the value of a "home of one's own" is not measurable in monetary terms, at all. Neither are the costs related to having other people know that you are "only renting".

I am not saying that there aren't many financial incentives, tax and collateral-related ("rammelån"), connected to owning. Yes, there are, but those are already "priced in". They are part of the very high price one has to pay for a home in Norway today. The real costs -- which go mostly unnoticed -- are related to uncertainty, to the risk of finding out later that one paid way too much. One cannot quantify these (very real) costs with any precision, which is a common problem with any "risks". As a consequence, they are easy to dismiss when one has already thought out thousands of reasons for buying.

These young people -- smart and good people -- are in this case "sheep", who, partly unknowingly, give the most important financial decision of their lives in the hands of commercial bankers. These bankers' careers depend -- or so they are led to think -- on them lending to these young people and thus growing the bank's profit. The bank shareholders, as too often is the case, have very little clue about what is going on. They focus on the current profits, and those are magnificient. There will be losses, but "optimists" remain skeptical till it's too late to turn around.

And finally, the authorities -- Norges Bank and Finanstilsynet -- cannot act decisively enough until it is too late to act decisively. To be fair, this is not a phenomenon restricted to Norway -- it is global -- and in my view both Øystein Olsen and Morten Baltzersen are highly competent people.

There you have my view on what has been going on and what is to come. Don't get me wrong: I am not a pessimist. I am a realist, and a pragmatist, who will become an optimist the moment the majority of people become pessimists.

It is time for Norway, and Norwegians, to face the facts. A boom is followed by a bust (as, for instance, this blogger has been saying for long), and our task is to minimize human suffering during the bust -- soften it, but not try to avoid it altogether. "Whatever it takes" mentality in both monetary and fiscal policy is a bridge to nowhere -- a huge misunderstanding. And just like bubbles, this misunderstanding will become obvious only after it has led us to real trouble.


  1. Hi Antti (usikker på om jeg kan skrive på norsk, så formulerer meg heller på engelsk)

    I'm a 28 year old economist, living and working in Oslo. I've still not purchased my first home as I'm quite skeptical and baffled regarding the housing market. Prices are just now fair in my opinion. I'm actually outraged by the price level in even the rural areas of the city. We are talking about average prices for apartments (of relative low standards) ranging from 3 - 5 times disposable income. Debt / disposable income ratios I believe are way above recommended levels, and this should be a sign of the economic conditions.

    In your opinion, do you think (i) the housing market is severely overpriced or a bit overpriced, fueled by the high demand and low supply conditions? (ii) Will building of new apartment complexes in and around the city dampen the price increase and bring it back to a normal level? (iii) Do you see any parallels to the US subprime mortgage cirisi of 07-08?


    1. Hi, Sarmad!

      Jeg har vært i Norge i fem år, snakker norsk ganske ofte og skjønner nesten alt i skriftligt form. Men jeg skriver helst på engelsk når det er snakk om økonomi -- ikke minst fordi vi mennesker knytter ofte dårlige språkkunskaper sammen med litt lavere IQ. Det er selvsagt feil gjort, men jeg har selv gjort samme feil før (though mostly unconciously) og tar dermed hensyn til det :-)

      To your questions:

      1. I think there is room for Norwegian home prices to drop even 30-40 % during the next 5 years. It doesn't mean that they will do it. The outcome is not for anyone to know, especially as it is very much connected to the currently very uncertain outlook for world economy. I have made it clear from the start (see my very first posts) that what will happen is ultimately not in the hands of Norwegians. Local authorities can affect the outcome, but not control it. I'm currently pessimistic on the behalf of the world economy. My main interest lies in understanding the world economy -- from a "macro hedge fund" perspective, although I'm not interested in making "money" (perhaps better way to put it would be "Bank for International Settlements perspective"). So I claim some expertise there -- Norwegian economy is just a side interest for me :)

      2. I'm expecting demand for housing to fall significantly during the rest of 2015, and further in 2016-2017, so I think there will be big difficulties with selling all the new apartments that arrive onto the market in 2015-2016. So I wouldn't say it will "dampen the price increase" -- rather "accelerate the price fall".

      3. I see many parallels to all housing bubbles we have ever seen. They are all different, and all are the same :-) Perhaps some parallels to the US market in 2003-2007 are the enormous credit growth, lenders's willingness to push out loans, and the explicit/implicit assumption of non-falling prices behind nearly all of the buyers' calculations. The "conventional wisdom" is so one-sided and strong, that even today experts in the media say that young people should buy and not wait -- no matter how the economy is slowing down significantly as we speak. The details vary, but this is no doubt a big bubble.

  2. GGMD adds a viewpoint: If you look for parallels to the US subprime it is not that hard to find:

    23% of all housholds owing their own home can barely or not at all handle a single increase in the interest rates!!!

    This survey was released mid-January 2015.

    Simple logic gives me the following correlation: The households with the most uncertaint jobs are also the ones with the highest leverage (its always that way).

    Wonder if these households can afford to serve their debt if unemployment strikes....

    Also: With the decline in inflation and real income growth which will be the new normal for the remaining of this decade, the principal wont decline as fast as the last 20 years. The effect of this is that the liquidity in the marked declines substantially as more people have to amoritize longer on their loans as the income/debt ratio dont decrease as fast as we seen since the early 90ies. Further more; If prices dont increase as rapidly as "normally", the liquidity in the marked will decrease further.

    As the basic rule of thumbs tell: Less liquidity equals declining prices.

  3. Thank you so much for writing this blog. I am quite skeptical about the Norwegian housing market and I still haven't taken the plunge to get into it despite strong encouragement from every Norwegian I know.

    Best regards,

  4. AnonymousJune 27, 2015

    Have you discontinued this blog? I would sure like your opinion on recent events..