104 scope for this thesis, which is why the implications of the assumption affecting this are mentioned but not elaborated on further.
105 expenditures on housing in Norway was even higher. The situation in the US was quite similar to the one in Norway. In 2000, the expenditure on housing was 15.7 % of disposable income, while it was 15.9 % in 2013 (OECD, 2015).
Following paragraphs will elaborate on the development in real housing prices in the US and Norway.
The development is shown graphically in figure 18. The statics are extracted from OECD and display the change in real housing prices from 1973 to 2017.
Figure 18: Development in real housing prices for Denmark, Norway and the US from 1973 to 2017 (OECD and authors’ own creation).
The US
The period from the end of World War II to the early 1970s is known as the golden era of American capitalism. During this period, the middle class was expanded along with a general improvement in productivity and economic output. The growth in the economy was seen across economic classes and led to high employment, low inflation and high profits. A boom in the housing market also reflected this improvement in the economy. The period of high growth and economic upturn was followed by a period of high inflation and high unemployment in the early to mid-1970s. The change in economic conditions was also mirrored in the housing prices, which decreased during that period.
Like Denmark, the US was also affected by the oil crisis in the 1970s. An expansive fiscal policy was introduced along with a cut of the federal tax rate by 25 %. These incentives helped the economy recover, but the effect on housing prices was not prominent, as observed in figure 18. The housing
106 market in the US experienced a steady increase in prices from the 1990s to the early 2000s. During this period, the GDP increased by 40.6 % (“PESTLE Country Analysis Report: United States”, 2018, p. 57).
The steep curve in housing prices in Denmark between 2004 and 2006, was not observed in the US.
However, the US experienced a slowdown in the housing market between 2006 and 2007. When the subprime crisis hit, and the recession started in 2008, the housing prices fell by a slightly lower pace compared to Denmark.
In recent years, the inefficient taxation system has impacted the demand for housing in the US. The government allows people to deduct interest rate on mortgage from their taxable income, which makes it more beneficial to be a homeowner than a renter. The effect of the taxation system was a higher effective tax rate for middle-class earners compared to high-income earners (“PESTLE Country Analysis Report: United States”, 2018, p. 42).
Norway
The development of the Norwegian housing market reflects the transition from being a relatively poor country to becoming one of the richest in the world. In the 1960s, prior to the first oil discovery, the economic situation of households was miserable. Most households were financed by one income and the effect of the post-war baby boom resulted in lack of housing. In addition to that, the housing market was also highly regulated. People had to apply for purchasing a house, and it was common to be on a waiting list for several years. The regulation of the housing market lasted until September 1st, 1982, and the effect of the deregulation significantly affected the housing prices. The prices increased by a factor of three from one day to the other (Iversen, 2016). The upward trend in prices is illustrated in figure 18. Though, the sharp price increase was followed by a drastic decrease from 1988 due to a national banking crisis. The banking crisis was caused by an ending of post-war regulations on loans and consumption. This deregulation triggered people to raise large loans and caused massive losses and breakdowns for banks. The government's decision of deregulation and their effort to solve the problem were criticised. It was claimed that this was the cause of the widespread banking crisis (Gram, 2017). Subsequently, the effect transmitted to the housing market.
In total, the housing prices decreased by 40 % from 1988 to 1993 (Jansen, 2011).
107 The general economic situation for households in Norway during the 1990s was comfortable after the repercussion of the banking crisis ended. The real income was ten times higher in the 1990s than the 1960 level, and it was normal that both of the cohabitants were employed. However, the effect on housing prices would have been intensified if it had not been for the high mortgage rate of 15 %. In the 1990s, people paid approximately 60,000 NOK annually for a mortgage loan of 375,000 NOK. That is roughly the same amount a home buyer paid for a mortgage loan of 2,000,000 NOK in 2016 (Iversen, 2016).
Like Denmark, the housing prices in Norway have increased since 1993 with only two small exceptions in 2002, as well as between 2008 and 2009. Unlike Denmark and the US, the impact of the financial crisis on housing prices was not as vital in Norway (Jansen, 2011). In fact, the effect was not highly noticeable on the real housing prices, as illustrated in figure 18. In total, the Norwegian housing prices increased by 75 % after adjusting for inflation from 2000 to 2011. This trend was mainly caused by the growth in real income, increase in housing supply, and improved interest rates for consumers. To tackle the increasing price level, the government has implemented regulations on the amount of equity needed to raise a loan. Today, people need 15 % of the total amount of equity.
These regulations have made it more difficult for first-time home buyers to enter the market and have reduced some of the demand pressure (Iversen, 2016).
Concluding remarks
The fact that Danes on average spend higher amounts on housing consumption than Norway and the US is interesting. This may be argued to indicate that changes in housing prices are of greater importance for individuals’ economy in Denmark compared to the two aforementioned countries.
Based on the graph of the observed housing prices, it is not easy to distinguish the effect of following a Taylor-inspired monetary policy. The developments in the three countries are quite similar, which can be explained by the fundamentals of the housing market. The housing market is highly correlated to the general economic condition of the country. Denmark, the US and Norway are highly developed with advanced economies and a significant percentage of educated people (“General assessment of the macroeconomic situation”, 2017). However, the resemblance between the housing prices on the Danish and the Norwegian markets is more prominent, compared to the US market. In general, the housing prices in Denmark and Norway followed each other closely between 1992 until 2017, except in the recession from 2008 to 2010. As mentioned in the previous paragraph, the financial crisis' effect on housing prices in Norway was not as crucial as in Denmark. So, while the Danish
108 economy experienced a shock to the housing market, the housing prices in Norway continued to increase. Furthermore, it can be argued that the historical housing prices in Denmark have been more volatile than in Norway and the US over the considered time period. Whether this is a cause of not conducting Taylor-inspired monetary policy is difficult to assess.
The observed country-specific developments in housing prices may indicate that the countries are highly influenced by general market conditions in the world. This, in turn, suggests that one country's monetary policy is vastly affected by the global economy. The domestic monetary policy may help reduce the largest fluctuations, but as identified previously in the thesis, the housing prices are determined by demand and supply in the free market. The similarities in the housing price development are, therefore, one reasonable argument for why the effect of implementing synthetic interest rates does not cause massive changes in the historical housing prices in Denmark.