One prominent feature of the post-Global Financial Crisis (GFC) world is that commodity producers’ housing markets have held-up far better than non-commodity producers, due in part to the rise of the Chinese economy.
Australia, Canada, and New Zealand are all notable commodity producers whose housing markets experienced only modest corrections in the wake of the GFC, and have strengthened since.
Added to this mix is Norway, which exports five times more oil per capita than Russia, and is Europe’s largest holder of natural gas and oil reserves. Not surprisingly, it also has a strong housing market. As shown below, Norwegian house prices more than doubled in the decade to June 2013, according to the Bank for International Settlements (BIS), with prices up 45% since the December 2008 trough:
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However, this rapid house price inflation now has the International Monetary Fund (IMF) worried. In its latest Article IV report, released this month, the IMF provided the following warning:
Real house prices increased by almost 6 percent in 2012, and household debt remains elevated at about 200 percent of disposable income. Household credit continues to grow steadily. While rising house prices are supported by high income growth, increasing population due to immigration, low interest rates and supply constraints, some households are highly indebted and vulnerable to a possible house price reversal.
…there are signs of overvaluation of house prices in Norway. The price-to-income ratio has a similar increasing trend to real house prices, and Norway’s price-to-rent ratio relative to the historical average in 2012 was the highest among the OECD countries…
Staff‘s estimates of house price valuation gaps… indicates that house prices in Norway may be overvalued by about 40 percent.
A large house price correction could significantly impact the economy, dampening consumption and residential investment. The negative impact could be significant given the high level of household debt and the fact that a certain segment of households is heavily indebted with debt to income ratio higher than five…
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To their credit, Norway’s authorities have gradually moved to implement macro-prudential measures to cool the housing market, albeit after the horse has already bolted, so as to prevent a repeat of the 1990s crisis that sent Norway’s housing prices plunging 40% and left households with unsustainable debt loads.
The Financial Supervisory Authority in Oslo has already lowered the cap on the loan-to-value ratio on mortgages to 85%. The Finance Ministry has also proposed tripling risk mortgage weights to 35%, the highest in the nordic region, along with other tightening measures.
However, the tightening measures are facing stiff opposition from the newly elected Conservative Government, who denies that Norway housing prices are a bubble and have promised to ease credit conditions for people seeking mortgages by reversing the above macro-prudential measures. If followed through by the new Government, the moves risks adding more fuel to the housing fire, worsening economic imbalances, and placing the economy at risk of catching “Dutch Disease”.
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Norway certainly looks like another housing market worth watching.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
