**5. Comparative Empirical Analysis**

**5.1. Hodrick-Prescott Filter**

**5.1.3. Comparison**

Oslo. Also, the magnitude of the Kristiania Crisis in 1899 is much larger, which is expected as this was primarily experienced in Oslo. The main characteristic we want to point out from this graph is the fact that both trends using smoothing parameters of 6.25 and 400 are below the real house prices from 2014 and out. From this we can conclude that both trends imply that the real house prices in Oslo are overpriced.

Figure 5.2

*Source: NCB, 2017; Own calculations *

We have observed that we currently have two different scenarios in Norway. For Norway in general today’s real house prices are below the estimated HP filters, both when using smoothing parameter’s 𝜆 = 6.25 and 𝜆 = 400, suggesting undervalued prices. However, when looking at Oslo by itself, the real house prices are above the estimated HP filter, which implies overvalued housing prices. From this we can conclude that there could exist a bubble in Oslo, but not for Norway in general.

The first country we will use the HP filter and compare the results from Norway with is Sweden. As the historical data available for Sweden is much shorter than Norway the time horizon here will be 1975-2016. Nonetheless, it is within this period the largest growth rate has occurred for all Scandinavian countries. Therefore, this window should be sufficient enough to be able to conduct the analysis with good results.

*Sweden *

Sweden went through its own banking crisis as Norway, between 1990-1995 (NCB, 2011). This is clearly seen in figure 5.3 which shows that the housing market was overpriced and not long after corrected to its average mean. Since then the housing market has grown, but the growth rate has not surpassed the trend line significantly. There are two periods where this happened and it was during the Financial Crisis, and now in recent times. Therefore, unlike Norway, one can conclude that given this data the Swedish housing market is in general overpriced.

Figure 5.3

*Source: SCB, 2017b; Own calculations *

Next, we look to the capital of Sweden, Stockholm. We did this for Norway as well to see if there were any deviations between the situation in the entire country and in the capital. In Norway, this happened to be the case. Looking at figure 5.4 the same trends are seen in Stockholm as in Sweden in general.

0 50 100 150 200 250 300

1975 1980 1985 1990 1995 2000 2005 2010 2015

### Real house prices with trend lines, Sweden (1975-2016)

Real House Prices HP - 6.25 HP - 400

Interestingly enough, it looks like the Financial Crisis did not have as great of an effect in Stockholm as it did for Sweden in general. If we look at the current market situation, the housing market in Stockholm seems to be even more overpriced and further away from the trend lines than in Sweden in general. This is also in line with recently published articles which state that Stockholm currently is experiencing record high prices per square meter of 94.000 SEK (SvD Naringsliv, 2017).

Figure 5.4

*Source: SCB, 2017b; Own calculations *

*Denmark *

Unfortunately, the only data we have been able to retrieve for Danish housing prices goes back to 1992.

Therefore, the Danish time series is both shorter than the Norwegian and the Swedish time series.

However, as we argued for the Swedish times series our main interest is recent developments, hence, there is no need to go as far back as the Norwegian time series. What is interesting to investigate is how the Danish housing market is doing compared to the Financial Crisis period, where the Danish housing market was hit particularly hard, compared to the other Scandinavian countries. The Danish housing market slumped around 30% through 2009 and only recently got back to the same housing prices level (Bloomberg, 2016).

0 50 100 150 200 250 300 350 400

1975 1980 1985 1990 1995 2000 2005 2010 2015

### Real house prices with trend lines, Stockholm (1975-2016)

Real House Prices HP - 6.25 HP - 400

Many chief economists and analysts in Danish banks have raised concerns about the current Danish
housing market, mostly because of the fact that Denmark is currently the country which has experienced
negative key rates the longest. Chief analyst Tore Stamer at Nykredit in Copenhagen said, *“To be *
*concrete, there is a danger that Danes will go blind to the risk of rates ever rising again” (Bloomberg, *
2016). From this it will be interesting to see how the current situation is for the housing market in
Denmark in general and Copenhagen.

When looking at figure 5.5 the Financial Crisis is very easy to spot. The housing market clearly experienced an overpricing compared to the long-term trend, and was eventually corrected. The housing market slumped so much that between 2010-2015 the housing market could have been considered underpriced. It is only in the past year the real house prices have yet again, only barely, moved above the long-term average for Denmark in general. This implies that Denmark in general is barely overpriced, using both smoothing constants.

Figure 5.5

*Source: Boligøkonomisk Videncenter, 2017; Own calculations *

Now, if we look at figure 5.6 we can see the development for Copenhagen alone. The development of the figure is similar to Denmark in general. What is interesting to notice is the current deviation between the real house prices and both trend lines are larger than for Denmark in general. Therefore, the HP filter

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### Real house prices with trend lines, Denmark (1992-2016)

Real House Prices HP - 6.25 HP - 400

implies that there is an overpricing in the Copenhagen housing market, arguably showing bubble
tendencies. This is also in line with what the director for the national bank of Denmark, Lars Rohde, said
in mid-2016, *“We have seen a moderation of price developments this year compared to last year. *

*However, it is still very strong for apartments. This is particularly true for Copenhagen’s housing *
*market, which should be closely followed” (DR Nyheter, 2016). *

Figure 5.6

*Source: Boligøkonomisk Videncenter, 2017; Own calculations*

By looking at Sweden and Denmark in general as well as their respective capitals we are able to investigate and compare whether Norway is experiencing an abnormal housing market or not. As the mentioned Scandinavian countries are relatively similar there are good premises to compare them to each other.

In retrospect, we concluded that the HP filter implied that the Norwegian housing market in general was not overpriced, and hence does not show bubble tendencies. However, both Denmark and Sweden in general showed signs of overpricing, although Denmark showed very little. To sum this, Norway in general is, relative to the HP filter, closer to its long-term average compared to its counterparts. With that said, all capitals; Oslo, Stockholm and Copenhagen are showing signs of overpricing and hence,

0 50 100 150 200 250 300 350 400 450

### Real house prices with trend lines, Copenhagen (1992-2016)

Real House Prices HP - 6.25 HP - 400

bubble tendencies. The fundamental factors for why this could be happening in Norway will be covered in a later section.