Friday, August 7, 2015

Catching Up

It has been six months since I last wrote, so there's some catching up to do.

Overall, the Norwegian economy seems to be on its way towards a recession (see, for instance, manufacturing PMI which is at 45.8 with inventories building up), if it isn't there already. This is what Norges Bank was worried about in the winter, and, as I said back then, rightly so. The latest steep fall in oil price will no doubt make matters worse. While in 2008-2009 the oil price recovered quickly -- thanks to massive worldwide stimulus --, the rebound we saw this spring turned out to be a so called "dead cat bounce". So, in some ways the situation is already worse than it was seven years ago. Comparisons have been made with the mid-1980s rout (the last time Norway saw a housing bubble burst). This is not to say that oil price cannot recover again, but even if it does, it is widely expected that it will remain subdued for years. The structure of the oil market has changed profoundly.

Speaking of catching up, it seems quite clear that the housing market needs to catch up with the rest of the economy. Whereas the overall economy has been developing just like I expected in the winter, the housing market has not: Oslo at the top shows double-digit growth year-on-year, and oil-heavy Stavanger region makes an exception with slightly negative annual growth. In my earlier post I linked to above, I wrote:

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!

Messrs Dørum and Willems were obviously right about the danger for continued credit growth, although I'm more willing to curse the irrationality of Norwegian homebuyers than the rate cut. That makes me sound like a bad loser, I know. I must admit I've been slightly lost during the first half of the year, reading news about young people rushing to buy homes. I have even heard from some well-off people that they would rather buy a rental unit than have their money on a savings account earning less and less interest. Have they lost their minds?

I can think of four reasons for the resilience of the housing market:

  1. People still believe the "housing deficit" story and act accordingly.
  2. Banks are willing to keep on lending to the less creditworthy borrowers.
  3. Complacency due to quick oil price and housing market recovery in 2009.
  4. When the interest rate on savings account declines, people think one should buy rental units (real assets, or risk assets -- although housing is still not seen as risky in Norway).

How long can this resilience last? Not for long, I believe. I will comment on the four points separately.

There are more and more signs that the housing deficit is turning into a housing surplus. The number of available rental homes is hitting all-time highs while housing starts have recovered from their 2014 slump and were very robust in June (in line with 29000 annual units). It is fairly typical that there seems to be a deficit of homes all the way until one day the demand -- which has been on abnormally high level during the boom -- collapses and the market is flooded with homes. A related measure is population growth (especially net, work-based immigration), and although we don't have any real-time data on it, I'm willing to bet that it is in clear decline. The first quarter of the year saw lowest Q1 net immigration since Q1 of 2007. Statistics for Q2 will be published on Aug 20th. (I wrote in more length about the population growth already in 2014.)

From July, the banks have been subject to stricter lending rules (less flexibility with LTV ratios, etc), and although this alone might not turn the market, it will surely affect it. We might have seen some effects already, as June was a very robust month price-wise in the market, while July surprised on the downside. Although the rules were published only in June so that there wasn't too much time for people to rush to buy before the rules were in effect, they were quite widely anticipated.

I have already touched the failed rebound and "double dip" in oil prices, and I think this makes the situation very much different than it was in 2008-2009 -- not least psychologically. Although there are signs of a broader slowdown in world economy, Norway is one of the countries that are first, and worst, hit. The oil price shock coincided with a well-advertised (already in 2013) decline in oil investments and the economy in general. As of yet, there are no signs of any big, worldwide stimulus. The slump is centered on Norway and it is not expected -- neither by Norwegian nor foreign economists -- to recide any time soon.

When the interest rates started to go down in 2008 it was not a good time to buy homes for instance in the US and the Netherlands. (Neither was it a good time to buy stocks.) Big declines in home prices are nearly always accompanied by central bank lowering the interest rates. Norges Bank is lowering the interest rates, and it will continue to do so in the autumn, because it expects a recession and possibly a housing bust in Norway.

Mark my words: There is trouble ahead, and the (seasonally-adjusted) home prices will most likely start to decline in the coming months. (I hope you have forgotten any similarly gloomy predictions of mine from 2013 and 2014.)