Data Material

• The rental equivalence principle; It is believed that all types of homes are homogeneous, and that there exists a corresponding rental price of these properties:

This assumption implies that house- or rental prices are not impacted by geographical location. This is an unrealistic assumption because all homes are distinctive, and homogeneity is virtually absent in reality. In the real world, every house is unique regarding both location and property structure. However, a simplification of reality is necessary to implement a P/R analysis with aggregate figures.

• Owner occupied- and rental housing are perfect substitutes:

This premise assumes that a price reduction in one will lead to reduced demand for the other, and vice versa. This obviously breaks with reality as well, when it is common knowledge that people have strong preferences to stay in their own home rather than rented homes, and therefore do not compete in the same market for housing. With today's price trends, macroeconomic conditions and fiscal policies, there are strong incentives to own a home instead of renting one.

• Zero transaction costs:

The theoretical framework is based on the assumption of the absence of transaction costs on purchase- and sale of housing. Again, the assumption violates with reality. An undoubtedly violation of this assumption is among other the document fee in Norway (the government’s share) of 2.5 % of the total sales price.

Results from our P/R analyses will be presented in section 7.2.3, but first we will present sources of the data material applied in the calculations.

House prices (P)

House prices are based on data material from The Central Bank of Norway for the period from 1870 until 2014. The figures show nominal average price per square meter for existing homes. The figures apply to all types of existing homes, such as detached houses, semi-detached houses and flats. For the years 2015 and 2016 we have used numbers from The Norwegian Housing Price Statistics²⁷.

Rental prices (R)

There are no statistical databases providing a direct measure for historical rental prices. However, there exist some different available data materials for the recent year’s rental prices. These figures vary in types of rental housing included, as well as costs and size of the geographical range taken into account. Statistics Norway has since the second half of the 1990s conducted a periodically survey of living conditions, namely the Survey on Living Conditions (SLC)²⁸, with the purpose to prepare official statistics on housing conditions, including paid rent for all types of homes.

The Tenancy Act of 1999 regulates rental prices in Norway, where a number of provisions regulate rental contractual conditions. Among other, according to § 4-2, the parties are under no circumstances able to raise the rents more than the increase in the overall price level given by the consumer price index. The average annual rent per square meter provided by the SLC in 2015 was estimated to be NOK 1 072. To calculate the rental price per square meter back to 1871, we are using the consumer price index (CPI). Since the Tenancy Act stipulates that rental price changes cannot be adjusted more than the CPI, we are able to estimate rental prices back in time. However, we are aware that the CPI does not necessarily represent developments in the actual rental price level. A landlord can choose whatever rental price he or she wants, but is not eligible to simply

27  The Norwegian Housing Price Statistics is a collaboration between Real Estate Norway, Eiendomsverdi AS and

Finn.no. The statistics do not comprise a total count of all house transactions in Norway, but are mediated realtors and listings through Finn.no, i.e. nearly 70 % of all sales of existing homes traded in Norway within a year.

28 The survey is an interview survey among a representative sample of 11,760 people aged 16 years and over of the Norwegian population.  

increase the rent in the long-term. The CPI figures are obtained from The Central Bank of Norway and Statistics Norway.

In addition, Statistics Norway has since 2005 provided a yearly rental market survey to provide statistics on rental prices for different types of housing in different parts of the country. This is to ensure a sound knowledge of the rental market. The Rental Market Survey (RMS) of 2015 presented the annual average rental price per square meter to equal NOK 1 686. However, we have chosen not to interpret results from this survey, because the level of investigation of RMS is to say something about the rental level and composition of the rental market at a given time, and the rent levels are presented by certain market segments. According to Statistics Norway, the RMS is not designed to provide estimates of rent changes over time (Statistics Norway, 2015a). Nevertheless, as both surveys would have been based on the same CPI figures, P/R values from both the SLC and RMS would naturally have shown equal development and fluctuations over time.

Fundamental P/R ratios

Girouard (2006) has been very helpful in the presentation of the fundamental P/R analysis from 1990 to 2004, and provided guidance of how the ratios should be calculated in the best possible way. This is important so that the numbers we calculate in the period from 2005 to 2015 can be compared with the previous years calculated by OECD publishing (Girouard, 2006). These numbers are taken from the article “Recent house price development: The role of fundamentals” from 2006.

The analysis will apply the following input variables from 2005-2015:

• Nominal borrowing rate: The nominal borrowing rate is taken from Statistics Norway²⁹ and is the bank's lending rates, measured as an annual average.

• Tax rate: It is assumed that the tax rate was fixed at 28 % until 2014. In 2014 it was reduced to 27 % (The Financial Supervisory Authority, 2016)

• After-tax nominal mortgage rate:

𝑛𝑜𝑚𝑖𝑛𝑎𝑙  𝑏𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔  𝑟𝑎𝑡𝑒−(𝑛𝑜𝑚𝑖𝑛𝑎𝑙  𝑏𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔  𝑟𝑎𝑡𝑒∗𝑡𝑎𝑥  𝑟𝑎𝑡𝑒). This is adjusted to include the offsetting benefit given by the tax deduction, which applies in Norway, and                                                                                                                          

29 Table: 08175 - Yearly Interest Rates on Loans and Deposits, Banks (Per Cent)

equals the cost of foregone interest that a homeowner may have earned on alternative investments.

• Property tax rate: Property tax is an optional tax form in Norway, which only some municipals apply, and the tax rate varies. However, OECD assumes the property tax rate of owner-occupied houses to be fixed at 0.7 % in their calculations (Girouard, 2006).

• Expected capital gains: Expected capital gains (or loss) on the house is calculated by the OECD methodology as a moving average of the CPI over the previous five years (Girouard, 2006).

• Depreciations: OECD assumes depreciations to be fixed at 4 % (Girouard, 2006).