Norway’s house prices hit a brick wall

Last Updated: Nov 14, 2007

Norway’s house prices hit a brick wall

An extremely nervous housing market saw a 1.2% decline in house prices in October, the third consecutive monthly fall, according to the Norwegian Association of Real Estate Agents. After a dramatic surge in house prices in 2006 and early 2007, the property boom appears to be pausing. However, Norwegian house prices are still 5.4 per cent above October 2006 prices.

The Norwegian economy is very strong, and this is part of the problesinom. GDP growth will be above 4% for 2007, according to Norges Bank. Unemployment is down to 2.5% of the workforce, much lower that the European average, according to a recent survey by Statistics Norway (Statistisk Sentralbyrå).

Yet base interest rates were held at 5% in the most recent Norges Ba nk (central bank) hearing, taking into consideration the turbulent world economy and the global credit crisis.

The market is anxious. There is an all-time high of properties on the market. Norwegian house prices have risen 48.82% over the five years 2001-2006, and 149.54% over the 10 years 1996-2006. House prices rose 16.69% y-o-y to end-Q1 2007, according to Statistics Norway. In Oslo and Baerum prices rose by 19.25%. Previous house price inflation rates were 14.49% in 2006, and 7.92% in 2005, continuing an uptrend which began again in earnest in 2003.

Norway’s mortgage market is largely dominated by floating rate loans, so is highly impacted by interest rate changes. Part of the environment which permitted previous low interest rates has been the very strong Norwegian Kronor. The Kronor has appreciated during the past three years against both the US$, and also somewhat against the Euro, keeping inflationary pressures under control.

Since mid-2006, interest rates on mortgages from private mortgage institutions have begun inching up. Today, mortgage repayments are barely covered by the typical rental yield. Gross rental yields in Oslo range from 3.5% to 5.0%, but out of this must be deducted expenses.

Owner occupancy

Aside from the preferential interest rate offered to households through the State Housing Bank, buyers can also purchase municipal land at subsidized prices. Owner-occupiers also get tax relief for mortgage interest payments. The return for owner-occupied housing is also taxed at a lower effective rate than the return on rental housing capital. Owner occupied dwellings are also exempted from capital gains tax.

Owner occupancy has always been popular in Norway, even before the housing policy favorable to owner occupancy was established.

Nevertheless state policy has had a strong impact. In 1920, about 47% of households were renters. The figure was much higher in the capital Oslo, at 95% of households. In 1960, the share of renters declined to about 40%. This fell further to about 23% in 2001; owner-occupancy was around 77% of households (63% freeholders and 14% coop-owners). In Oslo, the share of renters was a bit higher at 29% of households.

At the same time, there is an emerging consensus that the free market does not provide sufficient housing for the poor. In 1998, the Government agreed that the state should finance a new non-commercial rental housing sector, with the aim of building 50,000 new non-commercial rental dwellings over the next 10-15 years, located in the biggest towns, with low and regulated rents. Social rental housing made up around 19% of the 450,000 rental stock in 2001.

Second homes

Only about 21% of rental units are owned by professional landlords, i.e. owned by a real estate rental company or privately owned and situated in a multi-unit building. About 60% of rental units are either a) units inside or attached to the landlord’s primary dwelling or b) secondary dwellings let by owners in a temporary basis.

Probably due to low transaction cost in buying and strong government support for house purchase, about 10% of households in Norway own an additional housing unit. This is relatively high compared to just 2% in UK and 6.5% in the US and Canada. About 50% of the secondary houses have been acquired through inheritance. Interestingly, about 50% of these households do not rent out these second flats or houses. This is probably due to the low yields prevailing in Norway.

Strong growth, low interest

Despite the fluctuations in terms of GDP growth, the Norway has not experienced a recession since 1990. The economy expanded by more than 5% annually between 1994 and 1997. Even during the economic slowdown in 2002 and 2003, the GDP growth rate did not fall below 1%. Real wages increased by an average of 4.3% annually 1991 to 2005, with strong increases in 1998 (7.6% real wage growth), 2001 (7.4%) and 1999 (6.2%).

The official Norges Bank sight deposit rate has been moving quite strongly up, from 2.25% in February 2006, to 5.00 in October 2007. Yet the mortgage interest rates offered by state lending institutions still averaged 3.7% in June 2007, down from 10% in 1990. Private mortgage companies offered average rates of around 5.10% in June 2007, an increase of around 1% on a year earlier.