Statistics Norway Unable To Forecast House Prices - Lacks Money

No, seriously. According to this article, Statistics Norway (SSB) has exceeded its budget (due to budget overrun in new SSB website development) and can't publish forecasts in 2013 as often as it's done before. While waiting for Torbjørn Eika to come out and let us know what he thinks of the house prices going forward (which he must do, as this is an eagerly anticipated report?!), I'll extend SSB a helping hand:

SSB House price forecast for 2013-2016 - September 26, 2013

A significantly weakening sentiment in the real estate market during the summer has collided with a strong increase in supply of new dwellings, causing SSB to lower its forecast for 2013-2016 house price growth. Still, in stark contrast to the growing number of fear-mongering bloggers and so called "experts" (employed by banks) who anticipate falling prices, SSB expects a healthy growth in house prices during the next three years, driven by strong Norwegian economy and low interest rates.

So the party is not over, there's still enough punch in the fridge (which was upgraded last week, btw, thanks to a "reverse mortgage") to fill the bowl and no one can take away the hard-earned wealth of the Norwegian homeowner. We call this a democratic triumph, as 83 % of us own a house and the trickle-down effects will take care of the less fortunate 17 % - this is truly a tide that lifts all the boats. Hurra! Hurra! Hurra!

To Be or Not To Be (In The Market)

If you ask almost any Norwegian, everyone should be "in the market", i.e. own their home. To "enter the market" is the first goal of young people after they have secured a job. Only students and poor people are on the rental market. There is no place for price in this thinking, in the sense that it could very well be cheaper to rent a similar dwelling and still you just have to be on the market. Unfortunately I'm not even exaggerating, this time. Taken into account the extent to which taxation and society in Norway favors home ownership, it's hard to disagree with the masses on this. And in longer term, I don't. In shorter term, this is one of the most harmful versions of "conventional wisdom" I'm aware of.

This is what Wikipedia has to say about conventional wisdom:

Conventional wisdom is not necessarily true. Conventional wisdom is additionally often seen as an obstacle to the acceptance of newly acquired information, to introducing new theories and explanations, and therefore operates as an obstacle that must be overcome by legitimate revisionism. This is to say, that despite new information to the contrary, conventional wisdom has a property analogous to inertia that opposes the introduction of contrary belief, sometimes to the point of absurd denial of the new information set by persons strongly holding an outdated (conventional) view. This inertia is due to conventional wisdom being made of ideas that are convenient, appealing and deeply assumed by the public, who hangs on to them even as they grow outdated. The unavoidable outcome is these ideas will eventually not match reality at all, so conventional wisdom will be violently shaken until it doesn't conflict reality so blatantly.

"[I]deas that are convenient, appealing and deeply assumed by the public". Having an answer readily at hand without any need for thinking is convenient. Easy answers are also more and more appealing in a world where we face such an abundance of options, starting from how you want to have your sandwich or eggs. It's hard enough to choose the dream home, the best not just out of those available on the market but also out of the ones that might come to the market soon. It's almost impossible to spot the price bubble even if you have a master in economics, let alone if you'd have hard time explaining the word "inflation". It's not a consideration for laymen. All they can do is leave it to authorities to make sure that there will be no bubbles.

The idea that "it's always smart to buy" has very strong roots that have been strengthened along the way, not least during the last five years. If we start in 1987, the last time that Norwegian house prices crashed, how has the future treated those who bought at the top? Most of them survived and have done very well in the ensuing race to the current price level. No hard feelings there, it all ended well, and time has healed the wounds - wounds that felt no doubt a lot more real back then than they do now. So not even with these people does the story of a dangerous bubble live on.

No doubt it emerged people in 2008 who said you should wait with buying, and did so. And how wrong they were! The lesson is: "Just buy. Period." The models Statistics Norway uses are most likely heavily informed by this experience as well. Everything went wrong - oil price got decimated and financial system nearly collapsed - but house prices got only a small dent and recovered fast, and have not looked back. We are around 40-50 % above the bottom of that dip now. That's a very frightening thought, but only for people like me who think that the higher we get the bigger the fall later and the worse the consequences for Norwegian economy.

Taken into account what I write above, I understand how there are few like me. It just doesn't seem to make any sense to wait for the prices to decline. To suggest that is, if not stupid, just wishful thinking.

But none of this speaks against a bubble, does it? The conventional wisdom that it's always smart to buy is just plainly wrong as we know from history. It eventually leads to a bubble and will be violently shaken.

A Substantial Shift

I wrote my first blog post exactly one year ago, so I think it's time for a comeback after a long (slightly longer than even the Norwegian average) summer holiday. This time I have an excuse for my radio silence: my partner in life is now an honorable, respectable woman, and we don't live in sin anymore.

I feel tempted to say that the summer of 2013 marked a turning point also in the Norwegian housing market. The coming months will prove me right or wrong, of course. But consider this:

• The main banks (Nordea, and also DNB) see flat/negative price development in 2014 and 2015
• Real estate agents talk about "stabilizing" market with increased supply and less bidding
• Norwegian economy shows clear signs of slowing down and oil service industry is not expected to grow in 2014, compared with double-digit growth during last years

All this has brought us an environment where no one dares to take house price appreciation for granted anymore. Bi-annual research by Nordea (see above article) shows that while just six months ago 70 % of households expected prices to rise, in August only 32 % did so. I see a huge shift compared to just a year ago, when the general (SSB) expectations were for a 30 % price increase in the coming three years. It will be interesting to see where SSB will land in its next forecast.

Like I surely have mentioned before, SSB and the chief economists of the main banks will be among the last to tell you about falling house prices. It's just not in their interest to do so, and on top of that, they are the worst herd animals around - it's "If you're wrong and the others are right, you're out!" vs. "If you're wrong but the others are wrong too, who cares?". So it's safe to assume that they are fairly convinced of the price fall already.

When it comes to the talk about this "being good for the market, with supply finally meeting demand", I just ask: Weren't the sky high prices explained first and foremost by supply not meeting demand (see for example post about Erna Solberg, the new prime minister)? If supply finally meets demand, what will be the next thing supporting the all-time-high price level of  _____ (add here any - ANY - price per square metre)? Oil? New government? Unicorns?

Everyone has known for long that the prices are crazily high, but at the same time they have believed that there is a rational explanation, and that the prices will keep on climbing up. When all this is suddenly questioned, there will be consequences. Make no mistake about it.

Statistics Norway Calls The Housing Party Off?

In September last year I criticized Statistics Norway (SSB) for reckless behavior. I was more or less pissed at their forecast of around 30 % house price increase for the coming three years, because in my opinion it fed the overly rosy picture of Norwegian (1st and 2nd) home buyers and was helping to inflate a dangerous bubble. Well, a lot has changed since then:

It's hard to tell if they have decided to heed my advice, or if they have started to see some clouds in the sky, but I'd bet my money on the latter option. In just nine months SSB has moved from "Up, up, up!" to "Down, down, down.", when talking about the growth prospects.

By applying the same "linear extrapolation" that SSB presumably used for its Sep'12 forecast, to the rate of change between SSB's forecasts, you get an idea where we might be within the next nine months. But take into account that its latest forecast still assumes GDP growth of 3,0 %, 3,3 % and 3,2 % for 2014, 2015 and 2016, respectively, for Norway...

http://ssb.no/

Norway Is Not Alone

Norway is in a league of its own. Norway is special. Norway is lucky, for sure, but that luck is here to stay. It's the oil, stupid? We are all special - at least according to our mothers. And it's natural to find the explanation in the differences: "Yes, to an outsider it might look like a bubble, but...". But let's forget the differences for a while and take a look around the world.

Could it be that the biggest reasons for high house prices in Norway are similar to what other countries are experiencing around the world? Could it be that Norway is not that different after all?

New Zealand (with a population of 4,4 million) has fared well thanks to Chinese growth and, hence, the strength of Australian economy. This is what they write about the housing market there:

* RBNZ [central bank] sweating on housing bubble as prices hit records

* RBNZ mulls bank lending restrictions

* Rate hikes might be needed but would fuel soaring kiwi

* Loose global monetary policy pours capital into NZ

Sounds familiar? Can't raise interest rates because of the strength of the currency: check. Loose global monetary policy is the culprit: check. Bank lending restrictions: check. Central bank sweating on housing bubble: check. Prices hit records: check.

Canada, in many ways in a similar situation to Norway, having experienced a commodity-led economic boom, is seeing the housing market turn as we speak:

Mr. Carney said rapidly rising prices experienced in Canada over the past decade are “certainly not normal” and Canadians shouldn't count on home prices to be their main source of wealth gains.

“Real wealth is built through innovation, and it’s gained through hard work,” Mr. Carney explained in an interview taped before this weekend’s G20 finance ministers and central bankers meeting in Moscow. “It’s not through some magical asset inflation.”

           [...]

Canada’s housing market has been slowing since mid-2012. Housing starts and homes sales have come down, while prices appear to have peaked in many once-booming markets, such as Vancouver.

Canadians are continuing to add to their record debt levels – mainly through home mortgages and lines of credit – but the rate of increase has slowed substantially.

           [...]

Ottawa has tightened mortgage rules several times since 2008 to cool the market. But interest rates still remain at rock-bottom levels, as do borrowing costs.

And talking about the "Dutch Disease", it might be useful to look to the Netherlands in search for a possible future scenario for Norway:

Private homebuyers, for example, could easily find banks to finance more than 100 percent of a property's price. "You could readily obtain a loan for five times your annual salary," says Scheepens, "and all that without a cent of equity." This was only possible because property owners were able to fully deduct mortgage interest from their taxes.

Instead of paying off the loans, borrowers normally put some of the money into an investment fund, month after month, hoping for a profit. The money was to be used eventually to pay off the loan, at least in part. But it quickly became customary to expect the value of a given property to increase substantially. Many Dutch savers expected that the resale of their homes would generate enough money to pay off the loans, along with a healthy profit.

More than a decade ago, the Dutch central bank recognized the dangers of this euphoria, but its warnings went unheeded. Only last year did the new government, under conservative-liberal Prime Minister Mark Rutte, amend the generous tax loopholes, which gradually began to expire in January. But now it's almost too late. No nation in the euro zone is as deeply in debt as the Netherlands, where banks have a total of about €650 billion in mortgage loans on their books.

Consumer debt amounts to about 250 percent of available income. By comparison, in 2011 even the Spaniards only reached a debt ratio of 125 percent.

I'm sure we are all aware of the dire situation in Denmark and the talk about curbing lending in Sweden, so I don't need to go there.

In the end, it's all about loose global monetary policy and exchange rates. Like I've mentioned earlier, when countries like the US and Japan need to keep rates low and use unconventional measures (QE) to loosen the monetary policy even more, it has a big effect on countries like New Zealand, Canada and Norway, countries who have fared better than the US so far. You can call it "collateral damage" and rest assured that Messrs. Greenspan and Bernanke don't care about it. You have to save yourself.

I have an action for you today: Google "norwegian housing bubble" and have a look at the results. Isn't it a bit alarming that so many people around the world find the housing market of a country of 5 million people so interesting that they want to write about it, and not just that, but think that their readers find it interesting too? They are probably not aware of the peculiarities and strength of the Norwegian economy, so they find it amusing how a bubble of these proportions can go unnoticed by the home buyers and authorities, especially given that we all should know better after what has happened around the world during the last six years.

The Real Question

If someone says that arguing whether it's a bubble or not is most of the time retarded, I have to agree. But when the discussion really turns into nonsense is when the arguments for it not being a bubble are just arguments for prices being high at the moment. The usual stuff about continuing high demand and "them building not enough houses", you know. You can argue for hours about the future demand and supply, and the best you can arrive at is some kind of understanding of if there is a "bubble" in demand, i.e. the current demand is not sustainable in the future, or if there is shorter-term supply issue that will be solved (by building more houses in the coming years). But in no way does this address the real issue: the bubble in the prices.

Having seen how one-sided the public discourse on house prices in Norway is, I think it's best to explain a bit further. A financial bubble (in house prices, in stock prices, in tulips - you name it), or what I'd like to call simply too high prices, is always a result of high demand against a supply that doesn't fully meet the demand (supply that fails to keep the prices stable). If bubbles are a result of high demand vs. low supply, how can you tell a bubble or non-bubble by focusing on how demand exceeds supply?

The real question you need to answer to detect if it's a bubble or not is this:

What is a fair, reasonable price to pay for a house, and where does the market price stand in relation to this fair price?

It is a hard -if not impossible- one to answer. So, as Daniel Kahneman has taught me, we might substitute this hard question with an easier one focusing on the demand and supply, and by answering that question we think we have answered the ultimate question about if it's a bubble or not. But we haven't.

Try to ask someone what is a reasonable price for a house in Oslo. I don't have any accurate answer to it. But I can tell it's not

• what the market asks for,
• whatever amount the bank (including government & parental subsidies) is willing to give you,
• "any price" because real estate is always a safe investment in the long-term, or
• "any price" because Statistics Norway says house prices will go up until at least 2016 and I'll sell in 2016.

If you have no idea of a reasonable price, and instead rely on the bullet points above when deciding to buy a house, you risk paying way too much. Let's say during 25 years out of 30 it's fairly safe to buy. That might help you sleep at night, but it's still a big gamble to take when we talk about the biggest financial decision in many people's lives.

I have to admit that I don't try myself to answer the real question in any detail. I think you just can't know the answer. Instead I rely more on the "second-level thinking" I introduced earlier, trying basically to understand to what extent the buyers are being blind to the price (= follow the bullet point criteria above). Understanding this and the price of, and access to, credit is crucial in my opinion.

Beware The Hockey Stick Graphs

                               

                                (Source: SSB.no)

A shortage of supply or excessive demand? These are two sides of the same coin, so there is no sense in arguing which one is the primary cause of the house price appreciation of last 10 years in Norway. From the "hockey stick graph" above we can see that there has been a big increase in net migration, timing of which coincides with the economic boom in Norway (which in turn coincides with oil price appreciation). This net migration has lead to a rise in demand for housing.

The supply side of housing is always slower to adapt to a change in the market, so it shouldn't surprise us that there has been a lot of talk about "not building enough". This is the classical housing bubble cycle: Demand goes up - supply doesn't follow fast enough - prices go up. Supply follows with a lag, supply misses (due to the lag) the flattening of or decline in demand, which leads to oversupply and falling prices. As if it wasn't enough with this natural lag causing imbalances in the supply and demand, you can add to the equation the rising speculative demand due to rising (paper) profits through investing in a second or third (or 6th) house. And just like with the equity market, we have the biggest number of speculative buyers when the prices reach the top.

It is just impossible to know for sure where the above graph will continue, although it does seem that it is flattening out and there is also talk about increasing unemployment. I have touched the subject of oil price in my first posts, and that will have a big effect on the timing. But not just that. Even if the oil price stayed at the current levels, you will eventually get a decline in migration. That's because economic cycles never die.

My point with this post is that the current house prices are not based on stable, long-term developments. They are based on cyclical factors that have been quite extreme in the past 10 years. The outlook for European and world economy has rarely been as foggy as it is right now (many experienced investors can confirm this). This is a time to build some "nest egg" and prepare for a roller-coaster ride - not a time to count on a rosy future and get indebted like never before?

I end with an anecdote: Perhaps a year ago I read from Dagens Næringsliv of some experts who were expecting the prices in downtown Oslo to become so high that only rich people can afford them. They were drawing parallels between New York, London, Tokyo and Oslo. Downtown Oslo can end up like Manhattan, they were basically saying. We are now talking about a city which is surrounded by huge forests not more than a couple of kilometres from the city centre, and where they only now have started to build houses on a former airport, a 15 minutes' bus ride from the city centre.

I know that spotting a bubble is not this easy. I know it looked like a bubble already in 2006. But what we can be sure of is that if the bubble is going to burst during the next couple of years, we will have no shortage of ridiculous examples of how blind and stupid people were and how everyone should have seen this coming!