Norwegian property price bubble fundamentals could last for decade

Figures published by the Norwegian Home Builders’ Association (Boligprodusentene) suggest the country’s well known residential property price bubble could continue for another decade because of falling supply even as prices continue to rise.

This particular asset price bubble is well known across the country, and poses a test for the country’s central bank (Norgest Bank), which is juggling the contrasting targets of keeping a lid on asset rice bubbles as part of its role to keep inflation in check and promote financial stability, while not undermining output of products and services, where in particular exporters are struggling with the effects of a strong local currency, the NOK.

The Builders’ Association said in its latest quarterly report that while the number of residential property sales through the first nine months of 2012 were up 5.9% against the same period last year, the number of housing starts fell by 4.9% over the same period.

To illustrate the gap in supply that this change could lead to, the Builders’ Association said that while it would require some 35,000-40,000 new builds to balance supply against current demand, this year it is estimated that just 28,000 properties will be finished and sold.

It is estimated that the annual gap between supply and demand could last for a decade or more in the country’s biggest market, Oslo.

Annualised house price inflation is running at more than 9% on average in Oslo, Stavanger and Trondheim, according to figures from Statistics Norway. According to its house price index the Oslo market stood at 167.3 by the third quarter of 2012, against a base of 100 in 2005.

The Builders’ Association report may make for challenging reading at Norges Bank. It reported on 17 October that according to analysis of regional output data, the country’s economy continues to create employment, and although investment plans had been revised down somewhat from May, “all industries reported plans to increase investment over the next 12 months.”

The Bank’s consumer price inflation target is set at 2.5% for monetary policy purposes. Currently the key interest rate used to influence the market is set at 1.5%, in part because interest rates among key trading partners remain low. The Bank’s next interest rate policy meeting is scheduled for 31 October, and its next Financial Stability Report is scheduled for publication on 27 November.


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