As there is a lot of psychology involved in the housing market, and thus how the prices evolve, we will try to analyze some of the psychological factors that Case and Schiller name as the most important signs of a bubble. These are harder to quantify and measure accurately, but by analyzing certain indicators in the market we will try to get an overview of the market psychology.
11.1. See housing as an investment
In a survey done by the Norwegian Fund and Asset Management Association (NFAMA) in May 2016, 39% of Norwegians saw their own dwelling as their most profitable investment in the next 12 months.
Also, 11% ranked real estate, other than their primary dwelling, as their best investment. Real estate investments were therefore ranked as the most profitable by the majority of the responders. When evaluating the riskiness of their investments, housing was ranked as the least risky investment, even safer than bank deposits (Dagens Næringsliv, 2016b). From traditional finance theory, high risk yields high returns and not the other way around. Thus, this survey highlights the irrationality people exhibit when they see their dwelling as an investment. According to the director of NFAMA, Bernt S. Zakkarissen, this has been an increasing trend over the last few years. Zakkarissen said that, "people see housing as a magic investment that combines the highest reward with the lowest risk" (Dagens Næringsliv, 2016b).
Holbergfondene states that 54% of the total household economy is placed in real estate, while only 16%
is placed in stocks, funds or other financial savings. There has never been a period with a larger growth in house prices than the last 25 years, yet the return on investment has been higher for stocks and equally good for bonds (Holbergfondene, 2017). Secondary housing is an even stronger indicator, though it is difficult to measure whether the motivation is capital gains or consumer needs. In 2015 the total number of so-called secondary houses was 288,000, with a total value of 304 billion NOK (VG, 2015). From 2010 to 2013 there was a 22% increase in Oslo, giving a total of 52,300 secondary houses in Oslo in 2013. For those buying a second dwelling, the number one reason is the hope of making a good investment (NRK, 2015). To make it harder to buy a second dwelling in Oslo, the government has set stricter rules for the financing of these objects. We still must wait and see if the effects of these new rules will be as intended by the Minister of Finance.
11.2. Widespread agreement of an increase in prices
One way to quantify and test for an agreement of an increase in housing prices is to look at the amount of dwellings sold. Actual number of sales has been quite stable for the last 10 years, implying that there at least has not been a fear for a decrease in prices. An increase in sales could hint at a decreasing price, allowing more people into the market. Except for the years during the Financial Crisis, the number of sales has been around 80,000, as seen in Appendix 1.1. Thus, number of sales show no sign of people fearing declining prices. In an attempt to control the extreme price increase in Oslo, the government introduced temporary regulations on banks’ lending-policies. This seems to indicate that the government agrees that prices, especially in Oslo, will continue to increase. An increase in prices could also be a self-fulfilling prophecy, where the expectation of increased prices makes the prices go up. This effect can of course work both ways; if the market agrees that prices will go down it may cause an actual drop in prices.
11.3. Exaggerated expectations, excitement and word of mouth
By searching for "the Norwegian housing market" (boligmarkedet i Norge) on Google we get approximately 315 000 matches, with more than 25 600 news-articles (searched 05.04.2017). Each day a new article trying to predict the development of the Norwegian housing market is published. Limiting our search to news articles only from the past year still yields 5050 matches on Google, showing it is a hot topic. As the media tends to write about the topics that attracts more readers, it is likely that housing and housing prices is something that is important and interesting for the average Norwegian. An example of this is found in a gathering of front pages of two of the most important financial newspapers in Norway. This is found Appendix 1.2.
11.4. Sense of urgency in buying a home
Nobody wants to miss out on the opportunity to "gain" from the increase in the housing market, and therefore people feel a sense of urgency in buying a home. This has forced a lot of first time home buyers to get help from their parents to be able to enter the housing market and to buy their first home. Parents and grandparents sacrifice their own investments to help their kids, while some also see it as a way of investing their own money in a “safe bet” (Dagens Næringsliv, 2015b).
In Trondheim, Boligbyggelaget Tobb have created so called "renting-before-owning" apartments, for first time buyers to be able to buy without fulfilling the requirement of 15% equity. After renting for 3 years, they can buy the apartment without any equity. This project got more than 400 interested, and all were between the age of 25 and 35 (Hegnar, 2017).This is a fairly good indicator for the stress a lot of young homebuyers are feeling, and the urgency to buy a home.
11.5. Simple or simplistic theories
The amount of forced sales can give an indication to how people sometime use simplified assumptions about the economic situation and the housing market. Most people have to take on a lot of debt in order to buy a dwelling. If they fail to service their mortgage, the banks will put their dwellings up for a forced sale. They might have taken on too much risk, or not been realistic about their own economic situation and the duration of their investment. The number of forced sales seems to have been stable since the beginning of the 2000's until the Financial Crisis. Now it seems to have stabilized at a slightly higher level than what it was prior to the crisis, which therefore hints to more simplistic and unrealistic theories and expectations among the population. A figure of this development is found in Appendix 1.3.
11.6. The occurrences of sales above asking prices
For the past 14 years, sales above the asking price has been a common occurrence when buying a house.
Except for a significant drop in 2009 and a small in mid-2003, the yearly average deviation of price to asking price has been above zero every year since 2003 (Eiendom Norge, 2017a).
Figure 11.1
Source: Eiendom Norge, Finn, Eiendomsverdi AS
There has been a problem with so-called underpricing, where real estate agents underprice to get more interested parties to come to dwelling viewings and to join the bidding rounds. This can cause the price to potentially increase a lot. The Norwegian Consumer Council (Forbrukerrådet) has tried to control this behavior, to get the extreme bidding wars under control. The occurrence of sales above asking prices does not necessarily have to indicate a bubble. It might just be a product of excess demand or that the real estate agents deliberately underprice. Still, these are both signs of an unhealthy market, and these could in turn create bubble tendencies.
11.7. Perception of risk
As stated in the discussion earlier, people see housing as their most profitable and safest investment.
Thus, people do not fully understand the risks of buying a dwelling. Some forget about the fact that housing prices can go down, and that they have done so several times when you look at the history of the housing market both in Norway and abroad. Others forget that they must be able to service their mortgage. With the historically low key rate that we have now, there is not much room for it to continue go down, but it has a lot of room to increase. An increase of the key rate might render people unable to
service their mortgage. So far, NCB’s latest projections for the immediate future is to keep the key rate at roughly the same level (NCB, 2017). This projection was shown in figure 8.3 in section 8.
11.8. Conclusion
It seems that most of the seven characteristics are pointing towards a bubble in the Norwegian housing market. A reason for this is that they are closely linked together. A widespread agreement of an increase in housing prices will give people an incentive to quickly enter the market to benefit from the expected price increase. And with little perceived risk, people get an even stronger sense of urgency as they see no real downside with entering the housing market. This will again lead to more sales above asking prices, as the pressure on the houses for sale increases. Together, this creates a stable and high number of sales each year. One problem with applying this logic to the Norwegian housing market, is that this has been the situation for most of the indicators for more than 10 years. Therefore, it is hard to tell whether the indicators created for the American market can be easily applied to the Norwegian market.
Finding data to analyze and test the indicators is also difficult, and this weakens the power of the analyses done here. The strongest bubble sign we see after analyzing these indicators seems to be the fact that the government has implemented rules to try to control the price increase and regulate the housing market, and the high level of media coverage this topic has received. Lately, the price increase has shown some signs of cooling down. This could very well be the first step towards a healthier growth in prices, and not necessarily a sign that a housing bubble is going to burst.