Norway’s housing market shows signs of slowdown

Norway’s housing market is now cooling, amidst rapidly rising interest rates, high inflation, and slowing economic growth.

In Q2 2023, the nationwide house price index fell slightly by 0.14% from the same period last year, in contrast to a y-o-y increase of 6.35% in Q2 2022, based on figures from Statistics Norway. It was its second consecutive quarter of y-o-y decline and its worst showing since Q1 2018. When adjusted for inflation, Norwegian house prices dropped by a bigger 6.25% over the same period.

Though on a quarterly basis, house prices were still up by 3.93% (1.58% inflation-adjusted) in Q2 2023.

During the year to end-Q2 2023:

  • In Oslo including Bærum, the house price index fell by 0.68% (-6.75% inflation-adjusted), in contrast to a y-o-y increase of 5.72% in Q2 2022. During the latest quarter, house prices increased 2.93% (0.6% inflation-adjusted) q-o-q.
  • In Stavanger, house prices rose by a modest 2.44% y-o-y in Q2 2023 (declining by 3.83% in real terms), a slowdown from an annual growth of 6.44% in the previous year. Quarter-on-quarter, house prices were up 6.09% in Q2 2023 (3.69% inflation-adjusted).
  • In Bergen, the house price index dropped 0.23% in Q2 2023 from a year earlier (-6.33% inflation-adjusted), in contrast to a 6.21% y-o-y rise in Q2 2022 and its first decline since Q2 2018. Though on a quarterly basis, house prices increased 2.29% (unchanged in real terms).
  • In Trondheim, house prices fell by 0.86% in Q2 2023 from a year earlier (-6.92% inflation-adjusted),  in stark contrast to a y-o-y increase of 8.72% in Q2 2022. Yet during the latest quarter, house prices were still up by 2.21% (-0.1% inflation-adjusted) q-o-q.

Norway’s house price annual change

Of the country’s regions, Akershus excluding Bærum had the biggest annual house price decline of 1.75% (-7.76% inflation-adjusted) y-o-y in Q2 2023, followed by Vestfold and Telemark and Viken excluding Akershus (-1.46%), Nord-Norge (-0.54%), and Innlandet (-0.07%). Other regions, including Møre og Romsdal and Vestland excluding Bergen, Trøndelag excluding Trondheim, and Agder and Rogaland excluding Stavanger continue to see house price increases, albeit at a much slower pace of just 0.84%, 2.13%, and 3.18%, respectively.

Norway House Price Indices graph

Demand is now falling. During 2022, the total number of residential property transactions in Norway fell by 9.3% to 93,292 units, in contrast to an increase of 7.1% in 2021, according to figures from Statistics Norway. Transactions for all types of properties were down last year. The weakness of the housing market continued this year, with property transactions nationwide falling slightly by 0.2% y-o-y to 18,635 units in Q1 2023.

Anyone can own, occupy, and invest in real estate in Norway.

Residential construction activity continues to fall. During 2022, dwelling starts fell by 0.9% from a year earlier, and completions were down by 1.4% over the same period, according to Statistics Norway. Then in the first seven months of 2023, starts plunged 29.7% y-o-y to 12,371 units, and dwellings under construction fell by 12.7% to 43,001 units. On the other hand, completions rose by 8% to 16,380 units over the same period.

Norway’s mainland economy grew by 3.3% during 2022, following a 3.9% expansion in 2021, as economic activity recovered after pandemic-related disruptions. However, the country’s mainland economy is expected to slow, with a projected real GDP growth rate of just 1.3% this year and 1.6% in 2024, based on government forecasts.

Norway’s long house price boom

Prices of existing detached houses in Oslo rose by a whopping 250% between 2002 and 2022 (124% inflation-adjusted), to NOK 72,307 (US$ 6,756) per square meter (sqm). In Norway as a whole, existing detached house prices rose by 169% (73% inflation-adjusted) over the same period.

An existing detached house in Norway costs an average of NOK 30,328 (US$ 2,834) per sqm in 2022, up 4% from a year earlier, according to Statistics Norway.

During eight periods since 1990, house prices in Norway have risen by more than 10% annually, at least in nominal terms:

  • Q1 1994 - Q4 1994: average y-o-y growth of 13.3% (11.8% in real terms)
  • Q4 1996 - Q3 1998: 12% (9.4% in real terms)
  • Q3 1999 - Q3 2000: 16.8% (13.6% in real terms)
  • Q2 2004 - Q4 2004: 10.4% (9.2% in real terms)
  • Q1 2006 - Q3 2007: 14% (12.3% in real terms)
  • Q4 2009 - Q1 2010: 11.2% (8.8% in real terms)
  • Q1 2010 - Q2 2013: 25.9% (20.4% in real terms)
  • Q4 2013 – Q2 2022: 62.6% (29% in real terms)

Causes of these strong house price increases:

  • strong economic growth
  • low-interest rates

Annual price falls were observed only in five brief periods:

  • Q1-Q2 1993: -3.2% y-o-y (-5.6% in inflation adjusted-terms)
  • Q2 2003: -1.1% (-3.2% in real terms)
  • Q3 2008 - Q2 2009: -4% (-7.2% in real terms)
  • Q1 2018: -1.1% (-5.3% in real terms)
  • Q1-Q2 2023: -0.1% (-6.3% in real terms)

Norway HPI by Property Type graph

Property demand weakening

During 2022, the total number of residential property transactions fell by 9.3% to 93,292 units, in contrast to an increase of 7.1% in 2021, according to figures from Statistics Norway.

By property type:

  • Detached houses: transactions dropped 9.1% y-o-y to 33,332 units in 2022, after rising slightly by 0.5% in the prior year
  • Houses with 2 dwelling units: transactions fell by 9.5% y-o-y to 8,307 units last year, following an increase of 4.4% in 2021
  • Multi-dwellings: transactions fell by 9.7% y-o-y to 39,685 units last year, after increasing by 11.9% in 2021
  • Row houses: transactions were down by 5% y-o-y to 7,257 units in 2022, after increasing by 11.3% in 2021
  • Other buildings: transactions dropped 11.6% y-o-y to 4,676 units last year, following an increase of 20.1% in 2021

 In the first quarter of 2023, residential property transactions in Norway fell slightly by 0.2% to 18,635 units as compared to the same period last year.

Norway Residential Property Transactions graph

Mortgage interest rates rising rapidly

Norges Bank, the country’s central bank, raised its key interest rate by another 25 basis points to 4% in August 2023 to fight inflation. It was its twelfth consecutive rate hike in less than two years, raising the borrowing costs to their highest level since 2008.

“A somewhat higher policy rate is needed to bring inflation back to target,” said Norges Bank. Inflation continues to decelerate in recent months but remains far above the central bank’s target.

“The future policy rate path will depend on economic developments. If the economy evolves as currently anticipated, the policy rate will be raised further in September”, said Norges Bank Governor Ida Wolden Bache.

As a result, mortgage interest rates are also rising rapidly. In June 2023, the average interest rate for new housing loans rose by 4.69%, up from 2.4% in June 2022 and 1.75% in June 2021, according to Statistics Norway.

Over the same period:

  • Floating interest rate (Up to 3 months): 4.69%, far higher than the previous year’s 2.38% and 1.74% two years ago.
  • Fixed interest rate (More than 3 months): 4.73%, up from 3.82% a year earlier and 2.26% two years ago
  • Fixed interest rate (1-3 years): 4.75%, up from 3.86% in the previous year and 2.05% two years earlier
  • Fixed interest rate (3-5 years): 4.77%, up from 4.01% in June 2022 and 2.33% in June 2021
  • Fixed interest rate (Over 5 years): 4.63%, up from 4.06% a year earlier and 2.74% two years ago

Norway Interest Rates on Housing Loans graph

Tough mortgage loan restrictions

Despite the recent rise in interest rates, they remain far below international standards, requiring the Ministry of Finance to keep a tight watch on lending. Norway has the third-highest level of debt-to-income among OECD nations at more than 230%, behind only Denmark and the Netherlands - almost double its level in 1995. “The high debt of Norwegian households still poses a significant risk to the economy and to jobs,” said the Finance Ministry.

To restrain the increase in house prices the government introduced tough new residential mortgage loan requirements, which came into effect on January 1, 2021, and shall apply until December 31, 2024. The regulation was evaluated last year.

The rules include:

  • A borrowing cap of less than five times the borrower’s gross income;
  • Mortgages to last a shorter time;
  • In Oslo, an equity requirement of at least 40% for secondary home buyers, as opposed to the 15% equity for first-time buyers;
  • Lenders should make allowance for an interest rate increase of 5 percentage points when assessing a borrower’s debt-servicing ability.
NEW MORTGAGE LENDING REGULATIONS
Maximum loan-to-value (LTV) ratio, installment loans 85%
· Secondary dwellings in Oslo 60%
Maximum LTV ratio, home equity credit lines 60%
Required principal payments Loans with an LTV ratio above 60%
Maximum debt-to-income ratio 500%
Stress test of debt-servicing ability in the event of an interest rate increase 5%
Flexibility quota 10%
· In Oslo 8%

 Then in December 2022, the Ministry of Finance decided to amend the regulation’s requirement on debt-servicing ability to ensure that the customer has sufficient funds to cover regular expenses after an interest rate increase. At a minimum, the customer must be able to cover expenses if the interest rate is 7%, up from the current requirement of 5%. The amendments took effect on January 1, 2023.

The evolution of the requirements over time was shown in the table below:

EVOLUTION OF REQUIREMENTS FOR RESIDENTIAL MORTGAGE LOANS
  Mar 3, 2010 – Nov 30, 2011 Dec 1, 2011 – Jun 30, 2015 Jul 1, 2015 – Dec 31, 2016 Jan 1, 2017 – Dec 31, 2024
Maximum LTV ratio, installment loans 90% 85% 85% 85%
Maximum LTV ratio, home equity credit lines 75% 70% 70% 60%
Maximum LTV ratio, installment deferral Unspecified 70% 70% 60%
Maximum debt-to-income ratio 300% - - 500%
Stress test of debt-servicing ability in the event of an interest rate increase Unspecified 5% 5% 5%
(7% starting January 1, 2023)
The maximum rate of loans that can violate the regulation’s requirements each quarter - - 10% 10%
(8% in Oslo)
Maximum LTV ratio, secondary dwellings in Oslo - - - 60%

 As a percent of GDP, the size of the mortgage market is currently equivalent to more than 80%. DNB, Nordea, and Danske Bank are among the country’s top mortgage lenders.

Norway Credit Lines and Secured on Dwellings graph

Bubble territory? Maybe in Oslo, where rent rises the house price increases.

Is Norway experiencing a housing bubble? 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 about 60.5% from 2012 to 2022, the average monthly rent rose between 51.9% for one-bedroom dwellings and 59.8% for dwellings with four bedrooms, based on the figures from Statistics Norway. This shows that there is no significant difference between house price and rent growth in the past decade.

However, in Oslo and its neighboring municipality Bærum, house prices are outpacing rents. Oslo’s HPI rose strongly by about 77.5% from 2012 to 2022, while average monthly rents rose by around 45.9% to 53.3% over the same period.

There are two main reasons why house prices are outpacing rental rises in Oslo:

[1] Many investors have purchased apartments to rent out, which keeps rent prices down.

[2] Owning a house is relatively cheaper than renting a property, argues Nordea’s chief economist Kjetil Olsen and chief analyst Erik Bruce, partly due to the strong tax support for owning. He argues that it still makes sense to purchase a 30 square meters residence for NOK 3 million (US$ 281,687), rather than renting the same place.

Norway Rents and House Prices Annual Change graph

Yields are low; rents continue to rise modestly

Rental yields for residential properties in Oslo are quite low, ranging from 2.28% to 4.0%, according to research conducted by the Global Property Guide in November 2022. As one expects, smaller properties offer higher yields as compared to larger properties.

After 8 years of continuous house price increases in Norway, Oslo’s residential property prices are very high, making Oslo the world’s 15th most expensive city in which to buy a home but this year there has been a decline in prices. In terms of residential prices, we believe that Oslo is the eighth most expensive capital in Europe, and not surprisingly has some of the lowest rental yields of any of Europe’s capitals.

Transaction costs are low in Norway.

Nationwide, the average monthly rent for two-bedroom dwellings rose by 3.7% y-o-y to NOK 9,880 (US$928) in 2022, following a 2.3% growth in the prior year, according to Statistics Norway. Likewise, rents for three-bedroom dwellings increased by 3.8% y-o-y to an average of 11,560 (US$1,085) per month.

In 2022:

  • In Oslo (including Bærum), two-room dwellings had an average monthly rent of NOK 12,770 (US$1,199) while three-room dwellings cost NOK 15,680 (US$1,472) monthly.
  • In the municipality of Trondheim, two and three-room dwellings rent for NOK 10,160 (US$954) and NOK 12,100 (US$1,136), respectively.
  • In Bergen, two and three-room dwellings rent for NOK 9,620 (US$903) and NOK 11,420 (US$1,072) per month, respectively.
  • In Stavanger, rents averaged NOK 9,060 (US$851) per month for two-room dwellings and NOK 11,220 (US$1,054) per month for three-room dwellings.
  • In Akershus county (except Bærum), two-room dwellings had an average monthly rent of NOK 10,290 (US$966) while three rooms cost NOK 12,150 (US$1,141) per month.

From 2012 to 2022, residential rents in Norway have risen by nearly 60%.

Norway Average Monthly Rents for 2-BR Apartments graph

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 has been a massive shift in the structure of Norway’s housing market. In 1920, 47% of Norway’s households were renters. But recently only 17.9% were renters, while around 70.6% were freeholders and 11.5% shareholders.

Oslo has the lowest portion of homeowners at about 42.4%, while 25.9% of households in Oslo rent, with shareholders at 31.6% of total 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 total rental stock in Norway.

Norway has problems with undersupply

The IMF has recommended that the country should relax constraints on new property construction to rein in rapid house price rises. But residential construction activity in Norway has remained weak in recent years, exacerbated by the COVID-19 pandemic, as well as the adverse impact of global supply chain disruptions.

  • Dwelling starts fell slightly by 0.9% y-o-y to 29,864 units in 2022, following a meager growth of 0.7% in 2021, according to Statistics Norway.
  • Dwellings under construction increased slightly by 0.2% y-o-y to 47,614 units in 2022, after rising by a minuscule 0.4% in the prior year.
  • Dwelling completions were down 1.4% y-o-y to 28,010 units last year, after falling by 2.6% in 2021.

In the first seven months of 2023, starts plunged 29.7% y-o-y to 12,371 units, and dwellings under construction fell by 12.7% to 43,001 units. On the other hand, completions rose by 8% to 16,380 units over the same period.

Norway Dwelling Construction graph

Even before the pandemic, the increase in dwelling starts and completions in Norway was modest in comparison to countries such as Ireland or Spain, despite the house price boom. Dwelling starts averaged 31,000 during the boom years from 2004 to 2007, then fell to 21,000 units annually from 2008 to 2010.

Dwelling starts rose again to an annual average of more than 32,000 units from 2016 to 2022. Completions followed a similar pattern.

Norway Construction of Dwellings graph

There are currently 2,694,301 dwellings in Norway, up by 1% from a year earlier. From 2012 to 2022, the stock has grown by an annual average of 1.2%. Almost half of the total dwelling stock are detached houses.

Norway Dwelling Stock graph

The Norwegian economy still growing but at a slower pace

During 2022, Norway’s mainland economy grew by 3.3%, following a 3.9% expansion in 2021, as economic activity recovered after pandemic-related disruptions. The continued growth can be primarily attributed to strong fixed investment, consumer spending, and exports. Then in Q1 2023, real GDP expanded further by 3% from the same period last year, accelerating from a growth of 1.2% in the previous quarter and its eighth consecutive quarter of year-on-year expansion. 

Norway GDP Growth and Inflation graph

“The Norwegian economy is strong. It experienced one of the highest growth rates among advanced economies in 2022. The economy is expected to grow this year but at a more modest pace. The country has been in a unique position as the windfall gains from high petroleum and natural gas prices have so far countered global headwinds,” said the International Monetary Fund (IMF).

The country’s mainland economy is projected to grow by just 1.3% this year and by 1.6% in 2024, based on government forecasts. Economic growth averaged 1.2% from 2009 to 2019, before registering a contraction of 1.3% in 2020 due to the Covid-19 pandemic.

Norway’s petroleum industry improved dramatically last year, with Brent crude spot price up by nearly 68% year-on-year to US$122.71 per barrel in June 2022. It was the highest level seen in a decade and a huge improvement from the 21-year low of just US$18.38 per barrel it had reached in April 2020.

Though petroleum prices have been falling in recent months. In July 2023, the Brent crude spot price stood at US$80.11, up by 7% from the previous month but down by 28.4% from a year earlier.

The petroleum industry is the country’s largest industry, accounting for more than 20% of GDP, and around 47% of exports by value.

Norway Europe Brent Spot Price FOB graph

Inflation was 6.4% in June 2023, down from 6.7% in the previous month but remains far above the central bank’s target rate of 2%. Nationwide inflation averaged just 2% from 2010 to 2020 before accelerating to 3.5% in 2021 and further to 5.8% in 2022.

The labor market remains resilient. Nationwide unemployment stood at 3.4% in June 2023, unchanged in the past seven months, according to Statistics Norway. The country’s jobless rate averaged 4% in the past decade.

Krone continues to depreciate

The Norwegian Krone (NOK) is under depreciation pressure following surprisingly high inflation. The krone lost more than 10% of its value against the euro over the past year, reaching an average exchange rate of NOK 11.3245 = EUR 1 in July 2023. It depreciated a more modest 2.2% against the US dollar to NOK 10.238 = USD 1 over the same period.

In the past decade, the Norwegian Krone (NOK) has depreciated by about 29.6% against the euro, from NOK 7.3605 = EUR 1 in December 2012 to NOK 10.4612 = EUR 1 in December 2022. The krone lost 43.2% of its value against the US dollar over the same period, from NOK 5.6134 = USD 1 to NOK 9.8821 = USD 1 in December 2022.

Norway Exchange Rates Monthly Average graph

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