Norway’s housing market remains resilient

Lalaine C. Delmendo | October 24, 2022

Norway’s housing market remains strong, supported by low interest rates, limited housing supply, as well as improving economic conditions.

Norway house prices

The nationwide house price index rose by 8.1% during 2021, the biggest y-o-y increase since 2016, according to Statistics Norway. However when adjusted for inflation, Norwegian house prices rose only modestly by 3.3% y-o-y in 2021. During the last quarter (Q4 2021), house prices fell by 1.9% (3.1% inflation-adjusted).

During 2021:

  • In Oslo including Bærum, the house price index rose by 6.5% during 2021 (1.7% inflation-adjusted), following y-o-y increases of 7.8% in 2020 and 4.6% in 2019. During the latest quarter, house prices fell slightly by 0.9% (-2.1% inflation-adjusted).
  • In Stavanger, house prices rose by 9.7% y-o-y last year (4.9% inflation-adjusted), almost at par with the prior year’s 10% growth and in sharp contrast to a 3.2% decline in 2019. Quarter-on-quarter, house prices fell slightly by 0.5% in Q4 2021 (-1.7% inflation-adjusted).
  • In Bergen, the house price index rose by 6.3% during 2021 (1.5% inflation-adjusted), following y-o-y increases of 7.4% in 2020 and 4.2% in 2019. On a quarterly basis, house prices dropped 1.2% (-2.4% inflation-adjusted) during the latest quarter.
  • In Trondheim, house prices rose by 10.4% y-o-y (5.5% inflation-adjusted), up from annual increases of 6.4% in 2020 and 0.1% in 2019. During the latest quarter, house prices were up slightly by 0.2% in Q4 2021 (-1% inflation-adjusted).

Of the country’s regions, Nord-Norge had the highest annual price increase of 11.9% during 2021 (6.9% inflation-adjusted), followed by Trøndelag excluding Trondheim (9.9%), Innlandet (9.3%), Vestfold and Telemark and Viken excluding Akershus (9.3%), Møre og Romsdal and Vestland excluding Bergen (7.8%), Akershus excluding Bærum (7.4%), and Agder and Rogaland excluding Stavanger (7.2%).

Demand continues to rise, despite pandemic-related restrictions. During 2021, residential property sales in Norway rose by 7.1% to 102,835 units, up from y-o-y increases of 3.7% in 2020, 3% in 2019 and 3.9% in 2018, according to Statistics Norway. Though in Oslo sales were down by 2.5% to 12,104 units.

Despite this, construction remains weak. Dwelling starts rose by a meager 0.7% in 2021 while completions were down 2.6%, according to Statistics Norway.

Overall economic conditions continue to improve. The Norwegian economy grew by about 4.1% last year, after falling by 2.3% in 2020 due to the COVID-19 pandemic. The economy is projected to expand by another 4.1% this year.

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

Norway’s long house price boom

Prices of existing detached houses in Oslo rose by 193% between 2002 and 2020 (105% inflation-adjusted), to NOK 60,603 (US$ 6,867) per square metres (sq. m).

In Norway as a whole, existing detached house prices rose 135% over the same period. An existing detached house in Norway costs an average NOK 26,449 (US$ 2,997) per sq. m in 2020, up 3% from a year earlier, according to Statistics Norway.

Norway hosue price indices

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% 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)
  • Q1 2010 - Q2 2013: 25.9% (20.4% real)
  • Q4 2013 – Q4 2020: 37.8% (18% real)

Causes of these strong house price increases:

  • strong economic growth
  • low interest rates

Annual price falls were observed only in four periods:

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

Demand continues to rise

Demand continues to rise, despite pandemic-related restrictions. By property type:

  • Detached houses: sales rose slightly by 0.4% y-o-y to 36,678 units in 2021
  • Houses with 2 dwelling units: sales rose by 4.3% y-o-y to 9,183 units last year
  • Multi-dwellings: sales increased strongly by 11.9% y-o-y to 43,927 units last year
  • Row houses: sales rose by 11.4% y-o-y to 7,644 units in 2021
  • Other buildings: sales increased 19.7% y-o-y to 5,273 units

Norway residential transactions

Another rate hike looming, mortgage interest rates rising gradually

Norges Bank, the country’s central bank, kept its key rate at 0.5% in January 2022, after raising it by 25 basis points each in September and December 2021. However, another interest rate hike is looming.

“Based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised in March,” says Governor Øystein Olsen.

Norway interest rates housing loans

“In its discussion of the balance of risks, the Committee noted that while the Omicron variant appears to be less virulent than the Delta variant, there is still uncertainty about the further evolution of the pandemic. The Committee was also concerned with the risk of a potential rise in domestic price and wage inflation due to capacity constraints and persistent global price pressures.”

In December 2021, the average interest rate for new housing loans rose by 1.93%, up from 1.77% in December 2020 but still far lower than the 3.04% seen in December 2019, according to Statistics Norway.

Over the same period:

  • Floating interest rate housing loans (Up to 3 months) are: 1.92%, up from 1.77% a year earlier
  • Fixed interest rate housing loans (More than 3 months) are: 2.71%, up from 1.9% a year earlier
  • Fixed interest rate housing loans (1-3 years) are: 2.57%, up from 1.73% a year ago
  • Fixed interest rate housing loans (3-5 years) are: 2.71%, up from 1.79% in December 2020
  • Fixed interest rate housing loans (Over 5 years) are: 2.77%, up from 2.11% a year earlier

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 pose significant risk to the economy and to jobs,” said the Finance Ministry.

Norway loans secured dwellings

To restrain the increase in house prices the government introduced tough new residential mortgage loans requirements, which came into effect in January 1, 2021 and will be in force until December 31, 2024. The regulation will be evaluated this year.

The rules include:

  • A borrowing cap less than five times 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 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%

    DNB, Nordea and Danske Bank are among the country’s top mortgage lenders.

    Bubble territory? Maybe in Oslo, where rent rises lag 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 50.5% from 2012 to 2021, the average monthly rent rose between 45.1% for one-bedroom dwellings and 53.4% for dwellings with four bedrooms, based on the figures from Statistics Norway.

    However in Oslo and its neighbouring municipality Bærum, house prices are outpacing rents. Oslo’s HPI rose strongly by almost 73% from 2012 to 2021, while average monthly rents rose by around 38.8 to 48.7% over the same period.

    Norway average monthly rents

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

    [1] According to Morgen Granhaug of M3 Rental, 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 metres residence for NOK 3 million (US$ 337,408), rather than renting the same place.

    Yields are low, rents rising modestly

    Rental yields for residential properties in Oslo are quite low, ranging from 3.1% to 4.6%, according to a research conducted by the Global Property Guide. As one expects, smaller properties offer higher yields as compared to larger properties.

    Norway average monthly rents 2door apartments

    In 2021, the average monthly rent for two-bedroom dwellings rose by 2.3% y-o-y to NOK 9,530 (US$1,077) while rents for three-bedroom dwellings increased 1% y-o-y to NOK 11,140 (US$1,259), according to Statistics Norway.

    In 2021:

    • Two-room Oslo (including Bærum) dwellings had an average monthly rent of NOK 12,310 (US$1,391) in 2021, while three rooms cost NOK 14,920 (US$1,686) monthly.
    • In the municipality of Trondheim, two and three-room dwellings rent for NOK 9,780 (US$1,105) and NOK 12,210 (US$1,379), respectively.
    • In Bergen, two and three-room dwellings rent for NOK 9,510 (US$1,075) and NOK 11,160 (US$1,261) per month, respectively.
    • In Stavanger, rents averaged NOK 8,870 (US$1,002) per month for two-room dwellings and NOK 10,730 (US$1,213) per month for three-room dwellings.
    • In Akershus county (except Bærum), two-room dwellings had an average monthly rent of NOK 9,730 (US$1,100) while three rooms cost NOK 11,240 (US$1,270) per month.

    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% rented, 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 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 total rental stock in Norway.

    Norway has problems of under-supply

    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 remains weak, exacerbated by the COVID-19 pandemic.

    • Dwelling starts rose slightly by 0.7% y-o-y to 30,126 units in 2021, following a decline of 5.8% in 2020, according to Statistics Norway.
    • Dwelling completions were down 2.6% y-o-y to 28,398 units in 2021, after falling by 4.1% in the prior year.
    • Dwellings under construction increased by a meager 0.4% y-o-y to 47,720 units in 2021, after falling slightly by 1% in 2020.

    Norway dwelling construction

    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.

    Norway dwelling stock

    They then rose again to an annual 33,000 units from 2016 to 2021. Completions followed a similar pattern.

    There were 2,637,521 dwellings in Norway in 2021, up by 1.1% from a year earlier. Almost half were detached houses.

    Economic recovery

    Norway’s mainland economy grew by about 4.1% during 2021, in contrast to a 2.3% contraction in 2020, thanks to a recovery in domestic consumption, as well as exports, according to Statistics Norway. Economic growth averaged 1.2% from 2009 to 2019.

    Norway gdp inflation

    The Norwegian economy is projected to grow by another 4.1% this year, based on government forecasts.

    Norway’s petroleum industry is recovering rapidly, with Brent crude spot up more than 48% on the year in December 2021, at US$74.17 per barrel. That’s a huge improvement from the 21-year low of just US$18.38 per barrel it had reached in April 2020 but still below the average US$107.64 per barrel from 2011 to 2014.

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

    Norway crude oil prices

    In the past seven years, the Norwegian Krone (NOK) has depreciated by about 33.4% against the euro, from NOK 7.5479 = EUR 1 in April 2013 to NOK 11.3369 = EUR 1 in April 2020. The krone lost 44.5% of its value against the US dollar over the same period, from NOK 5.7951 = USD 1 to NOK 10.4335 = USD 1 in April 2020.

    Norway exchange rate

    The krone has been generally appreciating since, gaining 13.3% against the euro to NOK 10.0099 = EUR 1 in January 2022 and by 18% against the US dollar to NOK 8.8429 = USD 1.

    Nationwide unemployment fell to 3.4% in Q4 2021, from 4.2% in the previous quarter and 4.8% a year earlier, according to Statistics Norway.

    Inflation fell to a six-month low of 3.2% in January 2022, from 5.3% in the previous month. Inflation averaged 2.1% from 2011 to 2021.


    Sources:

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