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Mar 28, 2017

What's going on? Oslo's dramatic 21.6% house price surge

Norway House pricesNorway´s house prices have accelerated dramatically, especially in the capital city, Oslo.

Why?  Because Norges Bank has successfully countered weak economic growth by cutting interest rates, and this has caused a house price surge.

There was a 10.1% rise in the nationwide house price index during the year in Q4 2016, the strongest rise since Q1 2010, according to Statistics Norway. When adjusted for inflation, house prices were up by 6.32% over the same period.

But in the capital Oslo, house prices skyrocketed by 21.67% y-o-y (17.48% inflation-adjusted) during the year to Q4 2016. During the last quarter of 2016, Oslo´s house prices went up by 2.53% (2.08% inflation-adjusted) from the previous quarter.

In Q4 2016:

  • In Stavanger, house prices had a meagre rise of 0.37% y-o-y, and rose by 2.4% q-o-q.
  • In Bergen, the house price index rose by 3.17% y-o-y, and was up by 0.32% from the previous quarter.
  • In Trondheim, house prices had a strong increase of 9.06% y-o-y, however, prices dropped by 0.45% q-o-q.

Of Norway´s regions, Akershus excluding Bærum had the highest annual price increase at 14.3%, followed by Nord-Norge (11.67%) and Sør-Østlandet (9.53%). Agder and Rogaland excluding Stavanger, saw the weakest annual price growth at 0.05%, while the regions of Vestlandet excluding Bergen (4.58%), Trøndelag exluding Trondheim (5.96%), and Hedmark and Oppland (6.59%) had moderate annual price hikes.

The average price of dwellings sold was NOK 3.5 million (US$ 410,179) in the last quarter of 2016, while the average price of holiday homes on an owned site was NOK 1.7 million (US$ 192,616), according to Statistics Norway.

Total dwellings sold increased by 2.9% to 24,700 from the same period last year during the last quarter of 2016. Likewise, the total number of holiday homes sold also went up by 1.7% to almost 4,200 units.

Statistics Norway attributed this growth in housing demand to low interest rates, high population growth and several years of strong income growth. The statistics bureau expects house prices to slightly increase in 2017, "but less than last year given the growing number of homes on the market".

With the imposition of tighter credit rules, Statistics Norway predicts nominal house prices to slightly decline in the next few years.

Real Estate Norway expects house prices to flatten in Q2 and Q3 2017, with a demand/supply balance in most parts of Norway. Real Estate Norway CEO Christian Dreyer forecasts continued price rises in the first few months of 2017, despite tighter credit measures.

“In the short term, the measures will have quite a small effect. Those who will buy housing in the first months will do it on the basis of financing approval that they have received from banks before Christmas. The banks will probably stand by them. Eventually though, these tighter requirements will take effect but just how big their impact will be is uncertain,” according to Dreyer.

House price cycles

Norway is no stranger to rapid house price increases. Since 1990, house prices have risen by more than 10% annually, at least in nominal terms, during seven different periods:

  • Q1 1994 – Q4 1994: average y-o-y growth of 13.3% (11.8% in real terms)
  • Q4 1996 – Q3 1998: 12% (9.4% real)
  • Q3 1999 – Q3 2000: 16.8% (13.6% real)
  • Q2 2004 – Q4 2004: 10.4% (9.2% real)
  • Q1 2006 – Q3 2007: 14% (12.3% real)
  • Q4 2009 – Q1 2010: 11.2% (8.8% real)
  • Q4 2016: 10.1% (6.3% real)

Two major causes of these strong house price increases:

  • strong economic growth
  • low interest rates

Annual price falls were observed only in three periods:

  • Q1 1993 – Q2 1993: -3.2% (-5.6% in inflation adjusted-terms)
  • Q2 2003: -1.1% (-3.2%)
  • Q3 2008 – Q2 2009: -4% (-7.2%)

The average price of new detached houses in Oslo rose by 245% between 2001 to 2015, to NOK 54,567 (US$ 6,332) per sq. m. In contrast, in Norway as a whole, prices of new detached house rose only by 155%.

Key policy rate is at a historic low

Norway interests mortgage


In March 2016 Norway´s key rate was cut to a historic low of 0.5%, a reduction of 25 basis points from the previous rate of 0.75%. Another rate cut is still a possibility, and the rate could be pushed down to negative territory, but only if the country experienced more major economic shocks, said Norges Bank Governor Øystein Olsen.

While low inflation and a weak economic outlook imply another rate cut in coming years, the central bank said in a statement, that the uncertainty of its impact "now suggest a cautious approach to interest rate setting".

"A strong rise in house prices and rising household debt increase the risk for financial instability and is a strong argument to keep rates unchanged," according to DNB´s senior economist Kyrre Aamdal.

Strict new mortgage rules are likely to restrain further house price rises

Norway outstanding mortgage debt

To curb rapidly rising house prices the government implemented stricter mortgage rules on January 1, 2017. The rules are particularly focused on restraining house prices in Oslo.

Some of the new rules include:

  • A borrowing cap less than five times the borrower´s gross income;
  • Mortgages will run over a shorter time period; and
  • In Oslo, an equity requirement of at least 40% for secondary home buyers, as opposed to the 15% equity for first-time buyers.

While the new rules could reign in housing demand in the capital, Chief Executive Per Jaeger of Norwegian Home Builders Association (NHBA) believes that the more appropriate solution was for authorities to allow more building to raise housing supply.

in addition, says SEB economist Erica Blomgren, "It may help to curb housing prices, especially in Oslo, but nothing indicates that these rules will lead to a decline in housing prices."

As of Q4 2016, interest rates for outstanding housing loans were as follows:

  • Banks: 2.73%
  • Mortgage companies: 2.43%
  • Finance companies: 2.2%
  • State lending institutions: 2.07%

Norway´s mortgage market has grown from around 40% of GDP in 2000 to around 82% of GDP in 2016. Household gross domestic debt rose by 6.3% in 2016, to NOK 3.07 trillion (US$ 362.6 billion), around 97% of Norway’s GDP.

Construction activity is up; more supply to reach the market in 2017

Housing supply is set to rise in 2017. The country is expected to build around 38,000 homes in 2017, up from the earlier estimate of 33,000 and the highest amount since 1979, according to Forecaster Prognosesenteret.

"The level (of construction) is so high right now, and at least equal to the actual need, so it is hard to see further growth in construction in 2018 and 2019," says to Kjell Senneset, an economist from Prognosesenteret.

Norway construction dwellings

Housing starts surged in 2016, rising by almost 17% to 35,074 units, after a 14.3% increase in 2015. Dwelling permits also surged in 2016 for most building types.  Dwelling completions rose modestly to 2.4% to 27,814 units in 2016, a recovery from a 1.1% decline the previous year. 

"Population growth and urbanization makes it necessary to build many new homes in Norway in the coming years, especially in and around the major cities", according to Jon Sandnes, administrative director of Byggenæringens Landsforening (BNL).

Norway has been having problems of undersupply. The IMF even recommended that the country should relax constraints on new property constructions to boost housing supply, and rein in rapid house price rises.

However supply remains insufficient to satisfy Oslo´s demand. "There´s an upwards trend in housing starts, but Oslo has a need for even stronger growth. That´s our challenge," according to Norwegian Home Builders´ Association (NHBA) Chief Executive Per Jaeger.

The increase in dwelling starts and completed in Norway has been modest in comparison to countries such as Ireland or Spain, despite the house price boom. Dwelling starts averaged 23,000 units from 2000 to 2003, and rose to an annual average of 31,000 during the boom years from 2004 to 2007. They fell to 21,000 units annually from 2008 to 2010. From 2011 to 2015, dwelling starts rose again averaging at almost 29,000 units annually. The number of dwellings completed followed a similar pattern.

Rents lag house prices in Oslo

Norway average monthly rents

The Global Property Guide has not to date produced rent and yields statistics for Norway, so it is difficult for us to assess the level of rental yields.

Normally there is a clear pattern to housing bubbles, with house price rises greatly outpacing rent rises during the boom. In Norway, however, while the house price index (HPI) rose by 21.4% from 2012 to 2016, the average monthly rent for two-room dwellings rose by 28.8%, based on the figures from Statistics Norway.

However, in Oslo and its neighbouring municipality Bærum, house prices are climbing faster than rents. From 2012 to 2016, Oslo´s HPI rose by 35%, while average monthly rents for two-room dwellings rose by only 20%. The gap was even more pronounced in 2016, with monthly rents of two-room dwellings rising by only 3% y-o-y, far below Oslo´s HPI hike of 15.5% during the same year.

According to Morgen Granhaug of M3 Rental, the lower inflation of rents is attributed to the greater supply of rental apartments. Many investors have purchased apartments to rent out, which keeps rent prices down.

It is also because owning a house is relatively cheaper than renting a property, argues Nordea´s chief economist Kjetil Olsen and chief analyst Erik Bruce.  He argues that it is still makes sense to purchase a 30 square metres residence for NOK 3 million, rather than renting the same place.  

Norway´s most expensive rents are in Oslo, including Bærum. Two room Oslo dwellings had an average monthly rent of NOK 10,200 (US$ 1,205) in 2016, while three rooms cost NOK 12,880 (US$ 1,521) monthly. In the municipalities of Trondheim and Bergen, two and three-room dwellings rented for NOK 8,670 (US$ 1,024) and NOK 8,460 (US$ 999), respectively. In Stavanger, rents averaged NOK 8,440 (US$ 997).  In Akershus county (except Bærum) they averaged NOK 8,130 (US$ 960).

Owner occupancy is strongly subsidized by the state

State policy has had a strong impact on housing preferences in Norway:

  • Preferential interest rates are offered to households through the State Housing Bank.
  • Buyers can purchase municipal land at subsidized prices.
  • Owner-occupiers get tax relief on mortgage interest payments.
  • Owner-occupied housing is taxed at a lower effective rate than rental housing.
  • Owner-occupied dwellings are capital gains tax exempt.

The long-term impact of all these measures:  in 1920, about 47% of Norway’s households were renters, but by 2015 only 16% rented, and around 73% were freeholders and 11% are shareholders. In 2011, Oslo had the lowest portion of home owners at around 69% and its portion of renters was slightly higher at 30.7% of households.

At the same time, there is a consensus that the free market does not provide sufficient housing for the poor. Social rental housing made up around 15% of the 800,785 rental stock in 2001.

Modest economic growth in 2017

Norway gdp inflation

Falling petroleum prices have hurt Norway´s economy. Norway is the world’s eighth largest oil exporter and third largest gas exporter. Its petroleum industry is the country´s largest industry, accounting for more than 20% of GDP, and around 47% of exports by value in 2016.  As a result, the country´s GDP expanded by only 1% in 2016, a decline from 1.6% growth in 2015 and 1.9% in 2014, according to Statistics Norway.

However on an annual basis, the country´s economy expanded by 1.8% during the year to Q4 2016, due to increased domestic demand and rising investment. According to Statistics Norway, the country´s expansionary stance and interest rate cuts cushioned the economic slowdown, with lower interest rates stimulating consumption, investment and house prices.

The krone´s depreciation also helped boost exports and lowered imports.

In 2017, growth is expected to be around 1.2%, according to the International Monetary Fund (IMF). But Statistics Norway and Danske Bank both expect stronger growth, at 1.4% and 1.5%, respectively.

Statistics Norway predicts a gradual oil price hike from US$ 55 per barrel to US$ 64 by end of 2020, pushing up petroleum investments from 2018 to 2020.

Unemployment was around 4.4% in December 2016, based on the figures from Statistics Norway, down from 4.7% in the same month last year. But the drop in unemployment was primarily caused by the reduction of labor supply, according to the Labour Force Survey (LFS). Statistics Norway expects unemployment to gradually decline to around 4.3% in 2019.

In February 2017, Norway´s inflation stood at 2.5%, down from 2.8% the previous month. The slower growth rate is attributed to the decline of airfares and food prices, according to Statistics Norway. Nationwide inflation is expected to moderate to 2.3% in 2017, and to 1.8% in 2018, according to Norges Bank

The country has elections on September 11, 2017. The coming elections are set to be a tight race between the ruling coalition, composed of the Conservatives and the Progress Party, and the opposition, headed by the Labour Party.


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