Norway's housing market conditions continue to weaken, as property demand plunges amidst rapidly rising interest rates and a sharp economic slowdown.

Table of Contents

• Housing Market Snapshot
• Demand Highlights
• Supply Highlights
• Historic Perspective
• Rental Market
• Mortgage Market
• Socio-Economic Context

Housing Market Snapshot

In Q2 2024, the nationwide house price index increased slightly by 1.51% from the same period last year, following a meager growth of 1.2% in Q1 2024, and year-on-year declines of 0.73% in Q4 2023, 1.26% in Q3, 0.14% in Q2, and 0.07% in Q1, based on figures from Statistics Norway. Yet when adjusted for inflation, Norwegian house prices actually dropped 1.53% over the same period.

On a quarterly basis, house prices were up by 4.23% (3.17% inflation-adjusted) in Q2 2024.

During the year to end-Q2 2024:

• In Oslo including Bærum, the house price index rose by 2.48% (but dropped 0.59% when adjusted for inflation), following a y-o-y increase of 1.21% in Q1 2024. During the latest quarter, house prices increased 4.22% (3.15% inflation-adjusted) q-o-q.
• In Stavanger, house prices rose by a modest 3.61% in Q2 2024 from a year earlier (0.51% inflation-adjusted), a slowdown from a y-o-y growth of 5.4% in the previous quarter. Quarter-on-quarter, house prices were up 4.29% in Q2 2024 (3.23% inflation-adjusted).
• In Bergen, the house price index was up by 2.62% in Q2 2024 from a year earlier (declined by 0.45% inflation-adjusted), following a y-o-y rise of 1.42% in Q1 2024. On a quarterly basis, house prices increased 3.5% (2.44% inflation-adjusted).
• In Trondheim, house prices increased by a minuscule 0.29% in Q2 2024 from a year earlier (fell by 2.71% when adjusted for inflation), following a y-o-y increase of 1.48% in Q1 2024. During the latest quarter, house prices were up by 1.02% (unchanged in real terms) q-o-q.

Norway's house price annual change

Demand is falling rapidly. During 2023, the total number of residential property transactions fell by 4.9% to 88,686 units, following a decline of 9.3% in 2022. Then in the first quarter of 2024, transactions plunged further by 15.8% y-o-y to 15,681 units - the lowest sales recorded for any quarter since Q1 2016.

Residential construction activity continues to decline this year, following a quiet 2023. In the first six months of 2024, starts dropped 7.6% y-o-y to 9,998 units, and dwellings under construction declined by 10.7% to 38,655 units, according to Statistics Norway. Likewise, completions plummeted by 16.5% to 12,261 units over the same period.

The cooling housing market is not surprising given the wider economy's lackluster performance. During 2023, Norway's mainland economy grew by a minuscule 0.7%, a sharp slowdown from annual expansions of 3% in 2022 and 3.9% in 2021, amidst a decline in private consumption and construction investment. Except for the year 2020 when the economy suffered a pandemic-induced contraction of 1.3%, last year's performance had been the country's weakest since 2009.

The Norwegian government expects the mainland GDP growth to remain weak this year, projected at around 0.8% - at par with the IMF's forecast.

Demand Highlights

Property demand falling

During 2023, the total number of residential property transactions fell by 4.9% to 88,686 units, following a decline of 9.3% in 2022 and an increase of 7.1% in 2021, according to figures from Statistics Norway.

By property type:

• Detached houses: transactions dropped 4.8% y-o-y to 31,727 units in 2023, after falling by 9.1% in the prior year and rising slightly by 0.5% two years earlier.
• Houses with 2 dwelling units: transactions fell by 6.7% y-o-y to 7,751 units last year, following a drop of 9.5% in 2022 and an increase of 4.4% in 2021.
• Multi-dwellings: transactions were down by a modest 2.6% y-o-y to 38,667 units last year, after a decline of 9.7% in 2022 and a growth of 11.9% in 2021.
• Row houses: transactions declined by 9.3% y-o-y to 6,580 units in 2023, after falling by 5% in 2022 and increasing by 11.3% in 2021.
• Other buildings: transactions dropped 15.5% y-o-y to 3,949 units last year, following a contraction of 11.6% in 2022 and a growth of 20.1% in 2021.

In the first quarter of 2024, residential property transactions in Norway plunged further by 15.8% to 15,681 units as compared to the same period last year. It was the lowest sales recorded for any quarter since Q1 2016.

Supply Highlights

Residential construction activity falling

All indicators point to a depressed residential construction sector in the country.

• Dwelling starts plummeted by 23.6% y-o-y to 22,807 units in 2023, following a slight decline of 0.9% in 2022 and a meager growth of 0.7% in 2021, according to Statistics Norway.
• Dwellings under construction fell by 13% y-o-y to 41,442 units in 2023, after declining slightly by 0.2% in 2022 and rising by a minuscule 0.4% two years earlier.
• Dwelling completions were down slightly by 0.1% y-o-y to 27,974 units last year, its fifth consecutive year of decline.

In the first six months of 2024, starts dropped by 7.6% y-o-y to 9,998 units, and dwellings under construction declined by 10.7% to 38,655 units. Likewise, completions plummeted by 16.5% to 12,261 units over the same period.

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.

In 2024, there are currently 2,720,882 dwellings in the country, up by 1% from a year earlier, according to Statistics Norway.

From 2013 to 2023, the stock has grown by an annual average of 1.2%. Almost half of the total dwelling stock are detached houses.

Rental Market

Yields are low to moderate; rents rising strongly

Rental yields for residential properties in Norway are low to moderate, ranging from 2.32% to 6.51% in Q2 2024, with an average of 4.19%, according to research conducted by the Global Property Guide in June 2024. Surprisingly, larger properties offer higher rental yields as compared to smaller properties.

After almost a decade of continuous house price increases in Norway, Oslo's residential property prices are very high, making Oslo the world's 9th most expensive city in which to buy a home despite a decline in house prices in 2023. In terms of residential prices, we believe that Oslo is the fifth most expensive capital in Europe, and not surprisingly has some of the lowest rental yields of any of Europe's capitals.

Nationwide, the average monthly rent for two-bedroom dwellings rose strongly by 7.5% y-o-y to NOK 10,620 (US$965) in 2023, an acceleration from annual growth of 3.7% in 2022 and 2.3% in 2021, according to Statistics Norway. Likewise, rents for three-bedroom dwellings increased by 6.6% y-o-y to an average of NOK 12,320 (US$1,120) per month.

In 2023:

• In Oslo (including Bærum), two-room dwellings had an average monthly rent of NOK 13,850 (US$1,258) while three-room dwellings cost NOK 16,790 (US$1,526) monthly.
• In the municipality of Trondheim, two and three-room dwellings rent for NOK 10,830 (US$984) and NOK 12,590 (US$1,144), respectively.
• In Bergen, two and three-room dwellings rent for NOK 10,440 (US$949) and NOK 12,410 (US$1,128) per month, respectively.
• In Stavanger, rents averaged NOK 10,280 (US$934) per month for two-room dwellings and NOK 11,370 (US$1,033) per month for three-room dwellings.
• In Akershus county (except Bærum), two-room dwellings had an average monthly rent of NOK 10,850 (US$986) while three rooms cost NOK 13,030 (US$1,184) per month.

From 2013 to 2023, residential rents in Norway have risen by nearly 50%.

Mortgage Market

Policy rate kept unchanged; mortgage interest rates remain exceptionally high

Norges Bank, the country's central bank, kept its key interest rate unchanged for the fourth consecutive time in June 2024, to stay at 4.5% to fight inflation. Prior to this, the central bank hiked its key rate fourteen straight times in less than three years, raising the borrowing costs to their highest level since 2008.

Norway's mortgage loan interest rates:

"The policy rate has been raised significantly in recent years and has contributed to cooling down the Norwegian economy. Growth in the economy has slowed, and price inflation has declined. At the same time, the employment-to-population ratio is high. Inflation is still running above target, and the rapid rise in business costs will contribute to keeping inflation elevated ahead," said Norges Bank. "The Committee was concerned with the possibility that if the policy rate is lowered prematurely, inflation could remain above target for too long."

As a result, mortgage interest rates continue to rise rapidly. In May 2024, the average interest rate for new housing loans rose to 5.72%, up from 4.52% in May 2023 and 2.36% in May 2022, according to Statistics Norway.

Over the same period:

• Floating interest rate (Up to 3 months): 5.73%, far higher than the previous year's 4.52% and 2.35% two years ago
• Fixed interest rate (More than 3 months): 5.02%, up from 4.4% a year earlier and 3.64% two years ago
• Fixed interest rate (1-3 years): 5.03%, up from 4.42% in the previous year and 3.65% two years earlier
• Fixed interest rate (3-5 years): 5.07%, up from 4.41% in May 2023 and 3.71% in May 2022
• Fixed interest rate (Over 5 years): 4.89%, up from 4.35% a year earlier and 3.81% two years ago

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.

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 is shown in the table below:

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.

Historic Perspective

Housing cycle: long house price boom and brief house price falls

Prices of existing detached houses in Oslo rose by a whopping 250% between 2000 and 2023 (99% inflation-adjusted), to NOK 71,525 (US$ 6,500) per square meter (sqm). In Norway as a whole, existing detached house prices rose by 300% (127% inflation-adjusted) over the same period.

An existing detached house in Norway costs an average of NOK 30,056 (US$ 2,731) per sqm in 2023, down slightly by 0.9% from a year earlier but still the second highest ever recorded, based on figures released by 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 - Q4 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% (-3% in real terms)
• Q1-Q4 2023: -0.6% (-5.8% in real terms)

Bubble territory? Maybe 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 about 53.4% from 2013 to 2023, the average monthly rent rose between 49.7% for one-bedroom dwellings and 65.7% for dwellings with five 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 80% from 2013 to 2023, while average monthly rents rose by around 44% to 53.9% 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$ 272,638), rather than renting the same place.

Socio-Economic Contex

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.

Economic slowdown, decelerating inflation

During 2023, Norway's mainland economy grew by a minuscule 0.7%, a sharp slowdown from annual expansions of 3% in 2022 and 3.9% in 2021, amidst a decline in private consumption and construction investment. Except the year 2020 when the economy suffered a pandemic-induced contraction of 1.3%, last year's performance had been the country's weakest since 2009.

"Norway's economy is navigating a cyclical downturn amidst high uncertainty. Real GDP growth slowed notably in 2023, as tight financial conditions dampened private consumption and investment," said the IMF in its 2024 report.

Norway's economic slowdown seems not over yet, with the real GDP growth rate declining by 0.8% year-on-year in Q1 2024. On a quarterly basis, the economy grew by a meager 0.2% over the same period.

With this, the Norwegian government expects the mainland GDP growth to remain weak this year, projected at around 0.8% - at par with the IMF's forecast.

"IMF staff projects mainland real GDP growth to remain relatively soft at 0.8 percent this year as tight financing conditions continue to weigh on private demand. Over the medium-term, growth is expected to strengthen gradually to about 1½ percent as financial conditions ease and real incomes recover further," noted the IMF report.

Economic growth averaged 1.2% from 2009 to 2019, before experiencing a contraction in 2020 due to the adverse impact of the Covid-19 pandemic.

Norway's petroleum industry has been stabilizing, with Brent crude spot price up by 9.9% y-o-y to US$82.25 per barrel in June 2024. It was far below the recent record-high US$122.71 per barrel seen in June 2022 but a huge improvement from the 22-year low of just US$18.38 per barrel it had reached in April 2020.

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

The labor market remains resilient. Nationwide unemployment stood at 4.1% in June 2024, unchanged from the previous month but up from 3.5% in the same period last year. The country's jobless rate averaged 4% in the past decade.

"The labor market has remained resilient, despite a slight increase in unemployment. Growth is anticipated to strengthen gradually starting later this year as private demand recovers, supported by higher real incomes," said the IMF.

Inflation slowed to 2.6% in June 2024, down from 3% in the previous month and 6.4% in the same period last year. It marked the lowest reading since December 2020. Yet it remains 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. Inflation remained high at an average of 5.5% in 2023.

Krone continues to depreciate

The Norwegian Krone (NOK) has been under depreciation pressure in recent years following surprisingly high inflation.

From the beginning of 2022 to the first half of 2024, the krone lost more than 12% of its value against the euro to reach an average exchange rate of NOK 11.421 = EUR 1 in June 2024. Likewise, the domestic currency also depreciated against the US dollar by nearly 17% to reach NOK 10.612 = 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.

Sources:

1. The price index for existing dwellings (Statistics Norway): https://www.ssb.no/
2. Transfer of properties (Statistics Norway): https://www.ssb.no/
3. Interest rates in banks and mortgage companies (Statistics Norway): https://www.ssb.no/
4. Rate decision June 2024 (Norges Bank): https://www.norges-bank.no/
5. Policy rate (Norges Bank): https://www.norges-bank.no/
6. The lending regulation 1 January 2021 to 31 December 2022 (Government.no): https://www.regjeringen.no/
7. Amendments to the lending regulation (Government.no): https://www.regjeringen.no/
8. The lending regulation (Government.no): https://www.regjeringen.no/
9. Gross rental yields in Norway: Oslo, Bergen, and Trondheim (Global Property Guide): https://www.globalpropertyguide.com/
10. Rental market survey (Statistics Norway): https://www.ssb.no/
11. Dwellings (Statistics Norway): https://www.ssb.no/
12. Building statistics (Statistics Norway): https://www.ssb.no/
13. Petroleum and other liquids (U.S. Energy Information Administration): https://www.eia.gov/
14. Economic trends (Statistics Norway): https://www.ssb.no/
15. Norway economic snapshot (Organisation for Economic Co-operation and Development): https://www.oecd.org/
16. Norway: Staff Concluding Statement of the 2024 Article IV Mission (International Monetary Fund): https://www.imf.org/.
17. Meld. St. 1 (2023-2024) (Government.no): https://www.regjeringen.no/.
18. Norway GDP Growth Rate (Trading Economics): https://tradingeconomics.com/
19. National accounts (Statistics Norway): https://www.ssb.no/
20. CPI up 2.6 percent last 12 months (Statistics Norway): https://www.ssb.no/
21. Labor force survey (Statistics Norway): https://www.ssb.no/
22. The economic standstill in Norway will end soon (Statistics Norway): https://www.ssb.no/