Falling Norwegian housing prices threatens growth

Negative prognoses based on falling housing prices may not, in fact, spell disaster for the Norwegian economy. Yet, dependency on oil is a continuous policy problem that the new government also seeks to tackle.

Every January, Norwegians begin the new year with gloomy predictions that this year we will finally see the first cracks appearing in Norway’s oil-fueled economy. What makes the warning signs more serious in 2014 is a deteriorating situation in the housing industry.

In November 2013 housing prices fell for the third month in a row as average growth shrank to 4.9%, down from 7.7% in 2012. The recent forecast for 2014 from the association of real estate brokers, the EEF, predicts a decline in property prices of between 1% and 3% for 2014.

Several factors contribute to this development, most importantly that the supply of new houses has eclipsed demand, with 43% more unsold homes in December 2013 than a year before. A tightening of lending limits for property loans from 90% to 85% of the mortgage value has also played its part, restricting the availability of loans for many prospective homeowners. DNB, Norway’s largest bank, predicts a fall in the property market of 7.5% until 2017, yet believes it is a natural correction and not a sign of a troubled market.

For a country that has a strong tradition of home ownership for everyone, the first decline in the housing market since 2008 could spell bad news for the economy as a whole. Norwegians’ average household debt recently reached 200% of disposable income. In the US this figure was 110% before the housing bubble burst in 2007.

Moreover, Norway employs an unusually large share of its workforce in the construction industry: nearly 8 out of 100 are employed in this sector, compared to 5 out of 100 in the US. An expected decrease of 20% — $4.9 billion — in investments in new houses would make up 1% of GDP, enough to have a significant impact on growth forecasts.

Unsurprisingly, vocal warnings of the impending doomsday for this resource-dependent economy have been quick to materialize. Paul Krugman, in a recent visit to Norway, said that the housing market gave “reasons for concern,” but also that it was difficult to make any accurate predictions regarding such a small, oil-run economy.

This uncertainty materialised in currency markets, where views of the Norwegian krone, once regarded as a safe haven for investors during the financial crisis, changed. Last year the krone dropped by about 10% against the US dollar.

There is little doubt that Norway is a special economic case because of its massive supply of natural resources and comparatively small population. The government debt is less than 30% of GDP, the budget surplus exceeds 10% of GDP and the increasingly famous sovereign wealth fund (popularly known as the “Oil Fund”) has surpassed $800 billion, or more than $155,000 for each Norwegian citizen.

With unemployment levels at around 3% (though held artificially low due to generous public benefits schemes) it seems like the new conservative government of Prime Minister Erna Solberg is starting her term from good conditions. Still, the Norwegian economy slowed down in 2013. The IMF estimated modest growth of 1.6% of GDP (down from 3.4% in 2012), which is expected to rise to 2.4% in 2014.

Not everyone agrees that these developments, in particular a decline in the housing market, are necessarily all that negative. The massive oil and gas deposits are the main reason for the economic boom witnessed during the last two decades, but such prosperity has come at a price. The decade-long property boom has made it increasingly impossible for young people to get home ownership in large cities without parental support, having to rely on the strained rental market instead.

Salaries have also soared to levels unthinkable even in most Western European countries, to a point where young Swedes – not exactly famous for low wages themselves – now travel to Oslo in the tens of thousands to earn some cash with a few years of intensive labor.

Oil has been a blessing for this once impoverished country, but now the talk centers increasingly on how to avoid it turning into a curse that artificially inflates the rest of the economy. Siv Jensen, the recently inaugurated finance minister, said that one of her most pressing objectives was to make the economy less oil-dependent and become less reliant on global commodity prices. She follows the tradition of her many predecessors, who all made similar statements roughly once a year. It seems like it will be business as usual in Norway in 2014.

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Categories: Economics, Europe

Author:Havard Bergo

Håvard Bergo has lived and worked in the US, Europe and Asia, and has worked as an intern for the United Nations Office on Drugs and Crime in Bangkok and as a freelance journalist for Norwegian publications. Håvard holds an MSc in International Relations from the London School of Economics and a BA from NTNU in Norway. He has focused on studying East and Southeast Asia, and his interest in understanding regional affairs has resulted in extensive trips throughout the regions. His key passion and expertise is however in Myanmar. Having traveled there on multiple occasions, Håvard wrote his MSc dissertation on the political and economic liberalizations and is constantly staying up-to-date on developments in the country.

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