Norway’s housing market is slowing sharply
February 10, 2018
After almost eight years of uninterrupted growth, Norway’s housing market is cooling sharply, especially in the capital, Oslo. The slowdown can be partly attributed to the implementation of stricter mortgage rules on January 1, 2017, which were focused on restraining house prices in Oslo.
The nationwide house price index rose by a meagre 0.73% during 2017, after y-o-y rises of 10.09% in 2016, 4.54% in 2015, and 5.8% in 2014, according to Statistics Norway. When adjusted for inflation, Norwegian house prices actually fell 0.6% in 2017. During the last quarter, nationwide house prices continued down, falling by 1.7% (-1.98% inflation-adjusted).
The downturn is being felt most sharply in Oslo, where house prices fell by 3.01% y-o-y (-4.29% inflation-adjusted) during 2017, a striking contrast with the rise of 21.68% (17.56% inflation-adjusted) during the previous year, 2016.
In Q4 2017, Oslo’s house prices continued to fall, and were down by 2.45% (-2.73% inflation-adjusted) from the previous quarter.
- In Bergen, the house price index fell by 2.07% y-o-y (-3.36% inflation-adjusted), in contrast with a 3.15% growth in 2016. During the latest quarter, house prices fell by 3.02% in Q4 2017.
- In Trondheim, house prices fell 1.39% y-o-y (-2.69% inflation-adjusted), in contrast with a 9.06% rise in 2016. During the latest quarter, house prices fell 3.35% q-o-q in Q4 2017.
- In Stavanger, house prices rose by 3.75% y-o-y (2.38% inflation-adjusted), up from just 0.42% growth in 2016. During the latest quarter, local house prices rose by 3.21% q-o-q.
The average price of detached houses in Norway at end-2017 was NOK 24,550 (US$ 3,119) per square metre (sq. m.), according to Statistics Norway. Row homes' average prices were NOK 32,796 (US$ 4,167) per sq. m., and apartments' average prices were NOK 52,755 (US$ 6,703) per sq. m..
Of Norway’s regions, Hedmark and Oppland had the highest annual price increase at 6.36% (4.95% inflation-adjusted) in 2017, followed by Trøndelag exluding Trondheim (5.84%), Akershus excluding Bærum (3.05%), and Sør-Østlandet (2.84%). Minimal annual price hikes were seen in Nord-Norge (1%), Agder and Rogaland excluding Stavanger (0.92%), and Vestlandet excluding Bergen (0.2%).
Sales of all housing types fell by 0.7% to 54,945 in 2017, while sales of new homes plunged 22%.
Anyone can own, occupy, and invest in real estate in Norway.
Sluggish economic growth
Low petroleum prices have hurt Norway’s economy. 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 recent years, the country’s economic growth has been sluggish, with GDP expanding by only 1.1% in 2016 and 1.4% in 2017, after growing by 1.6% in 2015 and 1.9% in 2014, according to the IMF.
Economic growth is expected to improve slightly to 1.6% this year and to 1.9% in 2019, amidst gradual recovery in the oil and gas sector.
Europe’s Brent crude oil spot price rose by 20.7% y-o-y to US$64.37 per barrel in December 2017, but still far below the average price of US$107.64 per barrel from 2011 to 2014.
In the past three years, the Norwegian Krone (NOK) has depreciated by about 8.8% against the euro, from NOK 8.9727 = EUR 1 in December 2014 to NOK 9.8424 = EUR 1 in December 2017. Over the same period, the krone also lost about 12.5% of its value against the US dollar, from an average monthly exchange rate of NOK 7.2787 = USD 1 to NOK 8.3179 = USD 1 last month.
Further house price falls expected
“We believe there is still further downside to prices both nationally and in Oslo as the stock of unsold houses is still elevated, said Halfdan Fenwick Grangard, a senior economist at Svenska Handelsbanken in Oslo. “We expect housing prices to fall moderately over the next few quarters before leveling out.”
Real Estate Norway expects house prices to fall by just 1% this year while Fitch Ratings projects prices to fall by as much as 5%.
“What we’re seeing now is a normal adjustment of the housing market after years of rising prices,” said Prime Minister Erna Solberg.
“I see no need to alter the regulations. What we have in place is working pretty well at the moment and has helped put brakes on prices,” Solberg added.
Norway’s economy was estimated to have expanded by 1.4% last year, at par with the annual average growth rate of 1.4% in the past seven years, according to the International Monetary Fund (IMF). Economic growth is expected to improve slightly to 1.6% this year and to 1.9% in 2019.
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 2017: 22.7% (11.8% 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 178% between 2002 to 2017, to NOK 57,525 (US$ 7,309) per sq. m. In contrast, in Norway as a whole, prices of detached houses rose only by 118% over the same period.
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 run over a shorter time period; and
- In Oslo, an equity requirement of at least 40% for secondary home buyers, as opposed to the 15% equity for first-time buyers.
Norway’s mortgage market has grown from around 40% of GDP in 2000 to around 82% of GDP in 2016. DNB, Nordea and Danske Bank are among the country’s top mortgage lenders.
Interest rates remain very low
Norges Bank kept the key rate at a historic low of 0.5% in December 2017, unchanged since March 2016.
As of Q3 2017, interest rates for outstanding housing loans were as follows:
- Banks: 2.75%, slightly up from 2.73% a year earlier
- Mortgage companies: 2.47%, slightly up from 2.44% a year earlier
- Finance companies: 2.16%, down from 2.2% a year earlier
- State lending institutions: 2.06%, down from 2.11% a year earlier
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 27.4% from 2012 to 2017, the average monthly rent rose between 34.9% for one-bedroom dwellings and 28.2% 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 2017, Oslo’s HPI rose by 45.5%, while average monthly rents rose by only 29.5% for one-bedroom dwellings and by 19% for dwellings with five or more rooms.
There are two main reasons why Oslo's house prices are outpacing rental rises:
 According to Morgen Granhaug of M3 Rental, the lower inflation of rents is attributed to the greater supply of rental apartments. Many investors have purchased apartments to rent out, which keeps rent prices down.
 It is also because 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 over renting. He argues that it is still makes sense to purchase a 30 square metres residence for NOK 3 million (US$ 381,150), 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: in 1920, about 47% of Norway’s households were renters, but in 2016 only 22.7% rented, and around 63.1% were freeholders and 14.1% are shareholders. In 2016, Oslo had the lowest portion of homeowners at around 36.6%, its portion of renters was slightly higher at 30.1% of households, and shareholders represented about 33.3% 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 are rising, but not very fast:
In 2017, the average monthly rent for two-bedroom dwellings in Norway rose by 3.9% y-o-y to NOK 8,450 (US$ 1,074) and by 2.8% y-o-y for three-bedroom dwellings to monthly average rent of NOK 9,880 (US$ 1,255), according to Statistics Norway.
- Norway’s most expensive rents are in Oslo, including Bærum. Two-room Oslo dwellings had an average monthly rent of NOK 10,710 (US$ 1,361) in 2017, while three rooms cost NOK 13,120 (US$ 1,667) monthly.
- In the municipality of Trondheim, two and three-room dwellings are rented for NOK 8,960 (US$ 1,138) and NOK 10,600 (US$ 1,347), respectively.
- In Bergen, two and three-room dwellings are rented for NOK 8,530 (US$ 1,084) and NOK 10,340 (US$ 1,314) per month, respectively.
- In Stavanger, rents averaged NOK 8,160 (US$ 1,037) per month for two-room dwellings and NOK 10,000 (US$ 1,271) per month for three-room dwellings.
- In Akershus county (except Bærum), two-room dwellings had an average monthly rent of NOK 8,500 (US$ 1,080) while three rooms cost NOK 9,480 (US$ 1,204) per month.
Construction activity rising
Norway has been having problems of undersupply. The IMF even recommended that the country should relax constraints on new property constructions to boost housing supply, and rein in rapid house price rises.
“Population growth and urbanization makes it necessary to build many new homes in Norway in the coming years, especially in and around the major cities”, said Jon Sandnes, administrative director of Byggenæringens Landsforening (BNL).
However supply remains insufficient to satisfy Oslo’s demand. “There’s an upwards 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 completed in Norway 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. From 2011 to 2015, starts again averaged almost 29,600 units annually. The number of dwellings completed followed an almost similar pattern.
During the first eleven months of 2017:
- Dwelling starts: 32,858 units, down 1.6% from the same period last year
- Dwellings under construction: 556,743 units, up 13.1%
- Dwellings completed: 29,079 units, up 9.1%
Housing starts had surged in 2016, rising by almost 17% to 35,074 units, after a 14.3% increase in 2015, according to Statistics Norway. Dwelling permits also surged in 2016 for most building types. Dwelling completions rose modestly to 2.4% to 27,814 units in 2016, a recovery from a 1.1% decline the previous year.
Tax cuts expected soon
During the parliamentary elections of September 2017, non-socialist parties retained a reduced majority of 88 seats, allowing Prime Minister Erna Solberg’s Conservative-Progress coalition to remain in power. PM Solberg plans more tax cuts, in an effort to stimulate growth.
Unemployment was around 4% in October 2017, the lowest level since January 2015, based on the figures from Statistics Norway. Norway’s unemployment rate is expected to gradually decline to 3.8% this year and to 3.7% in 2019, according to the IMF.
Consumer prices rose by 1.6% in December 2017 from a year earlier, still well short of the Norges Bank’s target of 2.5%, according to Statistics Norway. For the whole year of 2017, inflation was 1.8% while core inflation was 1.4%.
Nationwide inflation is expected to rise slightly to 2% this year, and to 2.2% in 2019, according to the IMF.
- What's going on? Oslo's dramatic 21.6% house price surge - March 28, 2017
- Norway’s housing market slowing - January 05, 2014