Norway’s housing market stabilizing
Lalaine C. Delmendo | February 03, 2019
After almost eight years of uninterrupted growth, Norway’s housing market is now stabilizing, amidst almost stable demand, weak construction activity, stricter mortgage rules and gradually rising mortgage rates.
The nationwide house price index rose by 2.27% during 2018, after y-o-y rises of 0.73% in 2017, 10.09% in 2016, 4.54% in 2015, and 5.8% in 2014, according to Statistics Norway. When adjusted for inflation, Norwegian house prices increased by a meagre 0.16% in 2018. During the last quarter, nationwide house prices fell by 2.35% (-3.27% inflation-adjusted).
Oslo including Bærum had the highest annual price increase at 4.45% (2.28% inflation-adjusted) in 2018, a striking contrast with a decline of 3.01% (-5.16% inflation-adjusted) during the previous year, 2017. However, house prices in the capital city dropped 2.05% (2.97%) q-o-q in Q4 2018.
- In Bergen, the house price index rose slightly by 1.51% y-o-y (but dropped 0.59% inflation-adjusted), an improvement from a 2.07% decline in 2017. During the latest quarter, house prices fell by 2.42% in from the previous quarter (-3.34% inflation-adjusted).
- In Trondheim, house prices rose by 3.37% y-o-y (1.23% inflation-adjusted), in contrast with a 1.39% drop in 2017. In Q4 2018, house prices increased slightly by 0.18% q-o-q (-0.76% inflation-adjusted).
- In Stavanger, house prices fell by 3.31% y-o-y (-5.31% inflation-adjusted), in contrast with a 3.75% annual increase in 2017. During the latest quarter, local house prices fell by 1.33% q-o-q (-2.26% inflation-adjusted).
Of the country’s regions, Sør-Østlandet had the highest annual price increase at a modest 2.85% (0.72% inflation-adjusted) in 2018, followed by Akershus excluding Bærum (2.71%), Nord-Norge (2.53%), and Hedmark and Oppland (2.14%). Minimal annual price hikes were seen in Vestlandet excluding Bergen (1.18%), and Agder and Rogaland excluding Stavanger (0.4%). On the other hand, house prices fell by 3.35% in Trøndelag exluding Trondheim.
The average price of detached houses in Norway during 2018 was NOK 24,917 (US$ 2,911) per square metre (sq. m.), up 1.5% from a year earlier, according to Statistics Norway. Row homes’ average prices increased 1.4% y-o-y to NOK 33,252 (US$ 3,884) per sq. m. in 2018, and apartments’ average prices were up 1.2% y-o-y to NOK 53,404 (US$ 6,238) per sq. m.
In 2018, the total number of residential property sales in Norway dropped slightly by 0.6% from a year earlier. In Oslo, sales fell by 1.2% over the same period.
In 2018, the Norwegian economy is estimated to have expanded by 2.1%, the highest growth in six years, according to the International Monetary Fund (IMF). The economy is projected to grow again by 2.1% this year and by another 1.9% in 2020.
Anyone can own, occupy, and invest in real estate in Norway.
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 eight 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)
- Q1 2010 - Q2 2013: 25.9% (20.4% real)
- Q4 2013 - Q4 2018: 25.4% (16% 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 detached houses in Oslo rose by 184% between 2002 to 2018, to NOK 58,761 (US$ 6,902) per sq. m. In contrast, in Norway as a whole, prices of detached houses rose only by 121% over the same period.
Demand is almost steady
In 2018, the total number of residential property sales in Norway fell slightly by 0.6% from a year earlier, according to Statistics Norway. In Oslo, sales fell by 1.2% over the same period.
By property type:
- For detached houses, sales in the country fell by 2.5% y-o-y to 24,150 units in 2018
- For row houses, sales rose by 4.9% y-o-y to 8,882 units last year
- For multi-unit dwellings, sales dropped slightly by 0.6% y-o-y to 21,580 units in 2018
Strict new mortgage rules slowing housing market
To curb rapidly rising house prices the government implemented stricter mortgage rules on January 1, 2017. The new rules include:
- A borrowing cap less than five times the borrower’s gross income;
- Mortgages will last a shorter time; and
- In Oslo, an equity requirement of at least 40% for secondary home buyers, as opposed to the 15% equity for first-time buyers.
The restrictions were supposed to expire in June 2018 but the government recently extended them until the end of December 2019.
Norway has the third-highest level of debt-to-income among OECD nations behind Denmark and the Netherlands, at more than 231% - 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’s mortgage market has grown from around 40% of GDP in 2000 to more than 80% of GDP last year. DNB, Nordea and Danske Bank are among the country’s top mortgage lenders.
Interest rates rising gradually
Norges Bank kept the key rate at 0.75% in December 2018, after two rate hikes over the year.
As a result, the average interest rate for new housing loans increased slightly to 2.58% in November 2018, from 2.45% a year earlier and 2.44% two years ago, according to Statistics Norway. Over the same period:
- Floating interest rate housing loans (Up to 3 months): 2.57%, slightly up from 2.45% a year earlier and 2.43% two years ago
- Fixed interest rate housing loans (More than 3 months): 2.89%, up from 2.44% a year earlier and 2.56% two years ago
Rents lag house prices in Oslo
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 29.3% from 2012 to 2018, the average monthly rent rose between 42.8% for one-bedroom dwellings and 36.7% for dwellings with five or more bedrooms, 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 2018, Oslo’s HPI rose by 46.8%, while average monthly rents rose by only 38.9% for one-bedroom dwellings and by 32.4% for dwellings with five or more rooms.
There are two main reasons why house prices are outpacing rental rises in Oslo:
 According to Morgen Granhaug of M3 Rental, many investors have purchased apartments to rent out, which keeps rent prices down.
 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$ 352,380), rather than renting the same place.
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 by 2018 only 17.1% rented, while around 70% were freeholders and 11.5% shareholders.
Oslo has the lowest portion of homeowners at less than 40%, while 30% of households in Oslo rent, with shareholders 30% 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.
Rents continue to rise modestly
There was a 3.43% y-o-y rise in the average monthly rent in Norway for two-bedroom dwellings in 2018 to NOK 8,740 (US$ 1,022) (3.44% y-o-y for three-bedroom dwellings) according to Statistics Norway.
- Two-room Oslo (including Bærum) dwellings had an average monthly rent of NOK 11,240 (US$ 1,314) in 2018, while three rooms cost NOK 13,500 (US$ 1,578) monthly.
- In the municipality of Trondheim, two and three-room dwellings rent for NOK 9,070 (US$ 1,060) and NOK 10,610 (US$ 1,240), respectively.
- In Bergen, two and three-room dwellings rent for NOK 8,880 (US$ 1,038) and NOK 10,360 (US$ 1,211) per month, respectively.
- In Stavanger, rents averaged NOK 8,100 (US$ 947) per month for two-room dwellings and NOK 10,290 (US$ 1,203) per month for three-room dwellings.
- In Akershus county (except Bærum), two-room dwellings had an average monthly rent of NOK 8,770 (US$ 1,025) while three rooms cost NOK 10,020 (US$ 1,172) per month.
Construction activity remains weak
Norway has problems of undersupply. The IMF has recommended that the country should relax constraints on new property constructions to boost housing supply, and rein in rapid house price rises.
"There’s an upward trend in housing starts, but Oslo has a need for even stronger growth. That’s our challenge," says Norwegian Home Builders’ Association (NHBA) Chief Executive Per Jaeger.
The increase in dwelling starts and completions 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, then fell to 21,000 units annually from 2008 to 2010.
Dwelling starts again averaged 29,600 units from 2011 to 2015, and rose to an annual 34,800 units from 2016 to 2017. Completions followed a similar pattern.
However in 2018, dwelling starts fell again by 10.7% to 31,527 units from a year earlier, according to Statistics Norway. On the other hand, dwelling completions rose modestly by 4.3% to 32,830 units in 2018 from a year earlier.
There were 2,547,732 dwellings in Norway in 2018, up by 1.3% from a year earlier. About half of which were detached houses.
Modest economic growth; low employment
Low petroleum prices have hurt Norway’s economy in recent years. Norway’s petroleum industry is the country’s largest industry, accounting for more than 20% of GDP, and around 47% of exports by value. As a result of a plunge in petroleum prices in the past several years, the country’s economic growth has been sluggish, with GDP expanding by only 1.1% in 2016 and 1.9% in 2017, after growing by 2% in both 2014 and 2015 and 1% in 2013, according to the International Monetary Fund (IMF).
In 2018, the Norwegian economy is estimated to have expanded by 2.1%, amidst gradual recovery in the oil and gas sector.
The economy is projected to grow by 2.1% this year and by another 1.9% in 2020, according to the IMF.
Europe’s Brent crude oil spot price averaged US$57.36 per barrel in December 2018, far below the average price of US$107.64 per barrel from 2011 to 2014.
In the past four years, the Norwegian Krone (NOK) has depreciated by about 8.5% against the euro, from NOK 8.9727 = EUR 1 in December 2014 to NOK 9.8121 = EUR 1 in December 2018. Over the same period, the krone lost 15.6% of its value against the US dollar, from NOK 7.2787 = USD 1 to NOK 8.6209 = USD 1 last month.
Unemployment was around 3.8% in November 2018, down from 4.1% a year earlier, based on the figures from Statistics Norway. Unemployment is expected to decline to 3.7% this year, according to the IMF.
Nationwide inflation was 3.5% in December 2018, sharply up from last year’s 1.6% and well above the Norges Bank’s target of 2%, according to Statistics Norway. Inflation averaged 2% from 2009 to 2017.
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