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Norway house price crash: Aggressive Norges Bank rate hikes pile pressure on Norwegian property valuations

By Mensholong Lepcha

Edited by Valerie Medleva

15:41, 4 November 2022

Wooden houses on the shore of the Norwegian fjord, beautiful mountain landscape in winter
November’s rate hike took the nation’s interests to 2.5% Photo: iQoncept / Shutterstock

House prices in Norway are easing due to interest rate hikes implemented by the nation’s central bank since September 2021.

Property owners and first-time home buyers have been hit by a double whammy of high inflation and rising interest rates. The latest rate hike implemented in November 2022 took rates to 2.5% in Norway – a sharp rise from a record low of 0% present just over a year ago.

Is a Norway housing market crash imminent? Let’s find out below. 

What is a housing crash? 

A housing market crash is a period of sharp drop in real estate prices in a particular region. It is typically preceded by a housing bubble, which is a period of soaring property prices fuelled by increased demand, cheap loans and speculative interests.

There has long been a false perception that housing prices are immune to market crashes and will only increase with time. However, housing markets have historically undergone boom-and-bust cycles and are susceptible to factors such supply-demand dynamics and interest rates.

The US subprime mortgage crisis that started in 2007 is a widely-quoted housing market crash example. It was triggered by excessive mortgage borrowing at low-interest rates by under-funded borrowers, resulting in a speculative housing bubble. As the borrowers began defaulting on their mortgages, foreclosures increased, mortgage-linked securities held by banks crashed and property prices dropped. These events ultimately led to the financial crisis of 2007-2008.

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History of housing crashes in Norway 

According to a historical overview of the Norway real estate market, based on annual house price indices for four Norwegian cities of Oslo, Bergen, Trondheim and Kristiansand, housing prices in the country have seen multiple periods of boom-and-bust periods between 1819 and 2003. A report published by the Norwegian central bank showed that war, regulations and banking crises were key factors that led to declines in housing prices.

House price indices for the Norwegian cities fell during the 1920s during a decade-long banking crisis. Between 1940 and 1970, housing prices in Norway stagnated due to strict price freezes implemented near the Second World War.

According to Norges Bank, Norwegian house price indices saw meteoric growth of nearly 1,300% between 1970 and 2003 amid a booming Norwegian economy. The period also witnessed a market slump as housing prices crashed at the beginning of the 1990s following another banking crisis.

In the new millennium, property prices have extended their boom in Norway. Kjetil Olsen, Norway chief economist at Nordea Bank, explained:

“In the past 20 years, housing prices have more than tripled in Norway. A doubling of household income is only half the explanation. The rest is mainly due to lower interest rates.”

Housing Index in Norway; as of November 2022

Factors affecting housing crashes: Rates, oil prices and speculation

An analysis of Norway's housing market boom-and-bust cycles by the Copenhagen Business School noted that interest rates played a key role in stimulating housing market cycles by lowering or increasing the cost of credit in the country. The report concluded: 

“The Norwegian central bank sets the key rate, which influences the lending rates decided by banks. This affects the households’ wealth, loans and mortgages. Many Norwegian households have variable mortgage rates, and therefore changing interest rates is very pronounced and quickly affecting the housing prices.”

Energy prices have a profound effect on the economy of the Scandinavian nation and therefore can affect the housing market in Norway. 

Crude oil, natural gas and other natural gas liquids contributed 60% of Norway’s exports in 2021. The oil and gas industry directly or indirectly employed about 200,000 people in the country.

“The oil sector is an essential contributor to the Norwegian economy. We expect a positive correlation between the oil price levels and the housing prices in Norway. Norway is a net oil exporter, and increasing oil prices have a positive effect on the house price development,” said Copenhagen Business School.

Strong oil prices also support the crude exporter’s national currency, the Norwegian krone (NOK).

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So far in 2022, the NOK has fallen over 15% year-to-date against the US dollar (USD/NOK), as of 4 November, hurt by easing crude prices and capital flight to safe-haven currencies. 

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Another key factor critical in the making of Norway housing bubbles of the past was speculation. Access to easy credit and consistent returns from the housing market can contribute to increased speculation, which can distort the supply-demand dynamics in a market.

The Copenhagen Business School’s report noted:

“An increase in housing prices leads to higher speculation in the market. Higher investments lead to an increase in housing construction. This leads to a higher space for renting, which lowers the price due to higher supply. Thus, new constructions offset some of the effects of higher demand.” 

Why have housing prices been declining in Norway?

The latest Housing Price Index data for the third quarter of 2022 suggested Norway’s property bubble may be on the verge of popping. The change in seasonally adjusted price index for existing dwellings in Norway came in flat at 0% on a quarter-on-quarter basis in the third quarter of 2022.

Prices of existing dwellings in several cities, including Stavanger and Trondheim, fell from a quarter ago while prices in the Norwegian capital Oslo inched up 0.1% during the period. According to the Copenhagen Business School, house prices tend to fall at a slow pace as sellers take time to adjust to falling housing prices.

The prices of new dwellings in Norway have also showed signs of easing with the price index for new dwellings recording a year-on-year (YoY) increase of 6.9% in the June 2022 quarter, compared to the 9.8% year-over-year rise posted in the March 2022 quarter.

A key reason for the drop in housing prices is the rise of interest rates in Norway. Olsen at Nordea Bank explained:

“With zero interest rates during the pandemic, the policy rate and thus rates on housing loans bottomed out. We will not see this interest-rate effect again. The housing market rally – with significantly higher growth in housing prices than income growth – is over.”

The Norwegian central bank has been hiking rates since September 2021, from a record low of 0%. In early November 2022, the Norges Bank increased its policy rate to 2.5%, noting that rates will “most likely be raised further in December”.

The hiked interest rates have translated to increased ownership costs for homeowners in Norway due to a near 95% share of floating interest rates on mortgages in the country.

Norway housing market crash predictions

Olsen said higher increased rates do not necessarily mean that a housing market crash in Norway is imminent. The chief economist added that high construction costs could lead to developers holding back projects that may support housing prices:

“We have also seen previously that lower purchasing power in the housing market does not necessarily lead to a fall in housing prices as long as the economic situation is good, unemployment remains low and there is a feeling of job security.”

If a Norway housing market crash were to come, how long would it last? A lot could depend on the health of the Norwegian economy, interest rate outlook and disposable income among consumers.

The Copenhagen Business School highlighted in a report that studies from 1970 to 2005 revealed that a housing cycle has an average length of 10 years, with upturns averaging 5.5 years and downturns 4.5 years.

Data firm Trading Economics saw the Norway existing house price index decreasing to 318 by the end of 2022, from 320 recorded in September 2022. Trading Economics saw the index trending at 322 points in 2023 and 327 points in 2024.

The bottom line

Forecasting housing market crashes is a challenging task due to the unknowns of the future. Therefore, it is important to note that analysts and experts can be wrong in their Norway housing market predictions.

Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence. Remember that your decision to trade or invest should depend on your risk tolerance, expertise in the market, portfolio size, and goals. And never trade money that you cannot afford to lose. Keep in mind that past performance is no guarantee of future results.

FAQs

Does Norway have a housing crisis?

The latest Housing Price Index data for the third quarter of 2022 suggested Norway’s property bubble could be on the verge of popping. The change in seasonally adjusted price index for existing dwellings in Norway came in flat at 0% on a quarter-on-quarter basis in the third quarter of 2022.

However, keep in mind that analysts and experts can be wrong in their predictions. Always make sure to do your own research.

Is Norway's housing market a bubble?

Kjetil Olsen, Norway chief economist at Nordea Bank, said housing prices have more than tripled in Norway in the past 20 years due to doubling of household income and lower interest rates.

Remember that analysts’ forecasts can be inaccurate or wrong. Always do your own due diligence before trading or investing.

Will house prices drop in Norway?

At the time of writing, data firm Trading Economics saw the Norway existing house price index decreasing to 318 by the end of 2022, from 320 recorded in September 2022. Trading Economics suggested the index could trend at 322 points in 2023 and 327 points in 2024.

However, analysts’ forecasts can be inaccurate or wrong. Remember to always do your own research before trading or investing.

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