Norway

Norway’s housing market has been performing impressively. The house price index rose 8.4% during the year to the first quarter of 2011, according to Statistics Norway, or 7.5% adjusted for inflation.  The first quarter’s rise was a giant leap, with the index up 5.1% q-o-q (4.5% real), in contrast to a 0.1% drop in Q4 2010.

Norway’s market began recovering in early 2009, after house prices fell from mid-2007 to 2008:

      • In Oslo, house prices rose 10.9% (9.6% real) y-o-y to Q1 2011, and 5.9%        (5.2% real) q-o-q.
      • Bergen registered the highest annual house price increase with 12.2% (10.6%        real) y-o-y to Q1, Stavanger and Trondheim also rose 10.4% (8.8% real) and        9.20% (7.7% real), respectively. Western Norway recorded the highest annual        price growth among Norway’s regions, at 10.7%.
      • Northern Norway had the lowest house price growth at 3.4% y-o-y.

Low interest rates have pushed property prices up across all regions and property types, after Norway emerged unscathed from the global financial crisis.  Norges Bank, Norway’s central bank, started cutting key interest rates in Q3 2008 in response to the credit crunch, reducing the sight deposit rate from 5.75% to a historic low of 1.25% in Q3 2009. This led to mortgage interest rate reductions of as much as 4%, to around 3.4%-3.8% by Q3 2009.

But now, interest rates are rising again.  The key policy rate was raised by 25 basis points in May 2011, to 2.25%, and is expected to rise further by year-end. Norges Bank claims the hike aims at ‘currently low’ inflation, but with core inflation only 1% in May 2011, down from 1.3% in April, this seems unlikely (a strong Norwegian Krone keeps prices in check).  Possibly, the higher rates are also aimed at avoiding a housing bubble, as the risks are rising, given increasing household debt and house prices.

“Capacity utilization in the economy is rising…There are prospects that inflation will pick up over the year ahead,” says Øystein Olsen, new head of the central bank.

The unemployment rate in Norway is one of the lowest in Europe, at 3.2% in Q1 2011, down from 3.7% during the same quarter last year.

According to Bjoern Skogstad Aamo, head of the Financial Supervisory Authority of Norway, "It is…important to reduce the risk of new crises through a gradual, and not too slow, normalization of interest rates, through limits on bank housing loans, strict standards on banks' equity and continued active supervision of property markets."

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Norway is the world’s third largest oil exporter, and a major exporter of natural gas. The recovery of oil prices in late 2009 buoyed the economy.

However Norway’s economy grew by only 0.6% q-o-q in Q1 2011, though this was better than the 0.3% growth in Q4 2010. Higher electricity prices dampened electricity consumption, which also led to a 0.9% fall in goods consumption. The economy is expected to grow by around 2.9% in 2011, according to International Monetary Fund (IMF).

Except in 2009, Norway has not experienced a recession since 1990. From 2004 to 2007, the economy expanded by an average of 3% annually, mainly due to high oil prices, and expanded by more than 5% annually between 1994 and 1997. Even the 1.5% economic contraction in 2009 was relatively undisruptive, compared to other countries in Europe and around the world.

The average unemployment rate was 3.2 percent in Q1 2011. Although unemployment is expected to rise to 3.6% by year-end, it will remain one of the lowest in Europe.

There was only 1% core inflation in May 2011, down from 1.3% in April. Statistics Norway lowered its 2011 core inflation forecast to 1.3% from 1.5%, noting that a strong Norwegian Krone would keep prices in check.