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.)


  1. Takk for denne, skriv gjerne oftere! Om du ikke er det eneste fornuftens fyrtårn i den norske debatten omkring disse temaene, så er du jaggu ett blant få!

    Og hvordan har det seg egentlig at media i all hovedsak opptrer som mikrofonstativer for banker og eiendomsbransje? Intervjuer økonomer i bankene, samt meglerdirektører, som om de skulle vært "eksperter"? De er jo part i saken! Er det slapphet, ignoranse, eller simpelthen det at boligannonsene sørger for en så stor del av avisenes inntekter, at dette tør de ikke røre ved (nei tvert om heller, nå har de jo begynt å smugle inn eiendomsmegler-reklame forkledt som journalistikk i utgivelsene sine - jfr Bergens Tidenes Bonansa og andre).

    Hva tenker du om dette?

    1. Thanks for the kind words, Tarjei!

      I'm no expert on journalism, but I could think that this is a matter of supply and demand. Journalists want to write a lot about the housing market, because those stories are popular. But it takes some effort to come up with new ideas to write about. The easiest way must be to give air time for those who are happy to share their opinion. These are often the ones who gain from this kind of publicity, in one way or another. There are some who dare to express negative opinion, but most of the people who think this is a bubble have already burned themselves in earlier years. It is just so much easier to go to the newspaper and say something optimistic, now that the prices are still rising. Once the prices start falling, I'm sure we will see a lot more pessimistic coverage again.

      What you say about media's need to please those who pay for the advertising might be true, too. But I think they would generally be quite happy to publish negative opinions, too, if there were some experts who wished to express those. The supply just isn't there, yet.

    2. I agree. And in our modern world, with decreasing revenues for all printed media, there are hardly any investigative journalists left. It seems that most newspapers/news web sites today rely on recycled news agency stories and cat videos(!) to get by. The few journalists they have left are mainly news journalists who write on the go, with little time for in depth coverage. Which is part of the problem, obviously; young people nowadays have little inclination of what a tremendous anomaly today's housing market really is, because they don't get to read about that aspect of it, anywhere.

      And if any journalists out there read this, then please heed this heartfelt request: Stop the extravagant use of superlatives ("bonanza", "the housing party" ("boligfesten"), "optimism") when describing the housing bubble. Remember that save for a handful of (cynical) bankers and speculators, an inflated housing market is a deep tragedy, not only for society as a whole (considering the tremendous repercussions when the burst comes), but not least for young people, who have a hard enough time as it is; they can hardly get a decent job anymore, without working underpaid part time jobs for years beforehand. Remove your rose coloured glasses, journalists! You have a grave responsibility. These are troubled times, please do your job and write about it.

  2. Hi Antti, it's great to see you posting again. I have been reading the excellent blog with interest for some time. Having just moved to Norway two weeks ago with my Norwegian partner, your outlook is vital. I just wanted to say - more, please! And yes - we're renting.


    1. Thanks, Adam!

      And welcome to Norway! Nice to hear you find value in my writing. I guess many of the people who are renting and waiting for the prices to fall need some confirmation that they are not acting stupidly ;-) Include me in that category. I know of many who have already "capitulated" and bought, so we can't be that many left. Soon there is no one left to buy!

  3. Excellent post. It will be really interesting to see how this situation plays out.


    1. Thanks! Yes, it's going to be an interesting autumn.

  4. I always read your posts with interest but it seems that situation with housing develops differently than someone would expect from a logical point of view. I wait for a housing bust as well - already 2 years:))). However, I am really skeptical that we will have something like it was in other countries. This is due to several reasons. First of all, the problem is that NOK becomes weaker and weaker. Therefore, some people will start or already started to invest their money into housing market just to save the money but not to have a profit. The next point is that most of young people here in Norway can get a cheap loan. For them prices are still ok because their life is still long enough, and a wish to have own apartment is stronger than common sense.
    However the "positive" tendency is also recognizable, rental market is "overcrowded" by proposals which are not relevant and, therefore, owners started to adjust prices for the rent, making them lower and lower.

  5. Hello to everyone and Antti specifically. I've really enjoyed your writing and look forward to reading more. As an American that has lived between the US and Norway for the last couple of years, I enjoy reading and debating about the Norwegian economy and the discussions that your blog has fostered are wonderful. I must admit though I'm extremely frightened by what's happening here in Norway and the lack of action and response from both the government and the general public at large. Having spent significant time in what's called the "rust belt" in the US, I have seen first hand what can happen to an economy when people fail to adapt the market realties and just put their heads in the sand and carry on business as usual.

    What I think a lot of people fail to realize is that there has been a fundamental change in the oil industry. The price fluctuation is due to some one off economic crisis or the collusion of an oil cartel. The price drop is due US frackers that can now produce oil in abundance and cheaper. This coupled with the increased fuel efficiently in cars is going to push the long-term oil price down. This is what leads to the big problem, billions of Kroner have now left the Norwegian economy and has little chance of coming back until you can develop another industry to bring that money in. It’s like having a job that pays you 100,000 kr then going into work the next day and your boss telling you your salary is now 60,000 kr. You still have money coming in but it’s a lot less so things that you once could by, you can’t afford anymore.
    This is what leads to the second problem, the housing prices. There’s a housing bubble in Norway and it’s massive. For housing prices to keep going up you need just two things, demand and access to capital. Even if you have the demand, people have to have the money to pay for it. As said before, billions have left the economy in the form of lower oil prices. The effects of these lower oil prices haven’t yet impacted the economy at large but it will. I saw on Bloomberg television that the Norwegian home values have increased even far beyond what we saw in the US bubble. I don’t see how a serious fall in housing prices can be avoided with the loss of capital out of the economy coupled with the consumer spending drop that will happen with increased inflation due to the fall in the Kroner. Forgive my long response and I don’t wish to be doom and gloom but I’m very worried for homebuyers in the country. I think things are about to take a very bad turn for some.



  6. While a crash is very likely, you unfortunately are not stating the fact that you anyways have lost. How strong does the crash have to be to make up for the years you waited for it where you paid rent while the prices increased rapidly? Just the last years prices have grown double digits. a crash might bring us back 35% and you are still in minus. You may feel better by blogging about it but thats the truth you cant ignore.

    1. Rather unfair comment, no one could predict that the governments would continue to allow and actually fuel the credit bubble with the latest rate cut, allowing house prices to be so disproportionate to incomes.
      Further to this, given the devastation caused by the housing crises in Ireland, Spain, the US etc, it´s shocking that the media aren´t pursuing this as a major story. It´s equally strange that the banks with major exposure to the housing markets, aren´t being downgraded by the ratings agencies.

  7. Technically, the calls in 2013 and 2014 have been semi-right. Prices in Stavanger peaked in Q42012 / Q12013. Down about 9% now according to SSB statistics.

  8. AnonymousJune 02, 2016

    Where are we now in this process? Are your views still the same?

  9. It seems that we are very close to a bubble exposure. End of September or even middle September will be most likely a starting point for making prices more reasonable. Why? Just by intuition because logic does not work here...

  10. Hoping for an update :D Has the crash, or "significant adjustment" begun?

  11. Well:) There is an obvious over-saturation in supply at the housing market in Norway. Many apartments are being proposed for a lower price compared to the initially asked one but they are still not solved. Please wait a bit ... not long...