The pressure of being a home-owner
This is a discretionary assessment as it is difficult to measure. More people will enter the housing market if they feel that owner-occupied housing is a “requirement”. If the pressure is high, housing demand will increase and further push house prices up. In Norway, 84 %15 own their own home (Statistics Norway, 2015), and Statistic Norway’s report (2015) shows that this percentage has been relatively stable over the last decades. Due to a decreased interest rate and increased rental prices the last years, more people will choose owner-occupied housing rather than rental housing.
Numerous people believe that rental housing for longer periods is a waste of money, as they will miss out on the possible and expected increase in housing value. Hence, we can argue that there exists a pressure of being a home-owner in Norway by looking at the house price development and the ratio of homeowners. Accordingly, we believe this criterion to be fulfilled.
Widespread comprehension that it is profitable to own housing
Case and Shiller argue that an increase in people considering housing as an investment may point towards a housing bubble. One indication may be the development in secondary housing. From the
15 Percentage of the population over 16 years old. 90 % over 45 years old own their own home.
Norwegian Tax Authority’s report it is shown that 17 % of the housing market in 2015 represents secondary housing (Vegstein and Ekeberg, 2015). This is an increase of about 2 percentage points from 201316 (Sparre, 2013). Additionally, after the financial crisis, a lot of speculators had a tendency to turn from the financial market and enter the housing market instead, due to excessive volatility. Households may choose to buy a house instead of renting it because they expect a positive return on the purchase.
It is difficult to measure whether people are buying a house for future price increases or for consumer needs. However, according to a research done by GARANTI Eiendomsmegling (2015), 60
% believes that housing is the best long-term investment. Additionally, 70 % expects house prices to increase or be unchanged in 2016. We therefore find it reasonable to assume that several households find it profitable to own housing. Hence, this criterion is fulfilled.
Widespread expectations of increase in house prices
It is difficult to measure actual expectations in the market regarding the house price development.
However, we can see a tendency of houses being sold above the appraised value.
To measure market expectations, we can look at the development in total construction costs compared to house prices and new constructions. The level of new constructions and associated costs can provide indications of whether house prices will rise further. Figure 6.1 illustrates a strong growth in new constructions from 2009 until today. The level of commenced dwellings was in 2009 on the lowest level since the 1990s. Nevertheless, the activity level started to pick up again, and there was an increase of 60 % from 2009 to 2015.
16 Homes for holiday purposes are not included in these figures
Figure 6.1: Amount of commenced dwellings in Norway 1983-2015
In the following figure we have compared construction costs to house prices.
Figure 6.2: Construction costs and house price index Norway 1978-2016 (2000=100)
If the growth in house prices are greater than the growth in construction costs, the market will expect further growth in house prices. As illustrated in figure 6.2, the gap between construction
costs and house prices has increased since 2000. Construction costs grew by 72 % from 2000 to 2015, while house prices grew by 140 %.
The activity level in the construction industry changed after the financial crisis, due to uncertain future prospects and uncertainty regarding the interest rate. Further on, expectations of decreased house prices affected the construction industry, which resulted in a reduction in 2009. The fact that the construction activity was remarkably low in 2009 could have resulted in even greater pressure of the housing market activity. However, both expectations of higher house prices, and the actual increase in house prices, have been an incentive to more constructions.
Based on the elements presented above, we believe the criterion to be fulfilled.
House prices receive much attention in media and private conversations
The media coverage regarding the housing market has increased significantly in recent years.
Retrieve media collects statistics regarding topics published in the media. In the following figures we present media coverage of house prices and housing bubbles.
Figure 6.3: Media that concerns house prices in Norway (1987-2015)
Figure 6.4: Media that concerns housing bubbles in Norway (2002-2015)
As illustrated in the figures, the media coverage of housing bubbles and house prices has increased in recent years. There are various factors explaining the increased focus of the housing market.
Firstly, the large increase in house prices in recent years has affected the media’s attention.
Secondly, the financial crisis has led to a greater focus on the economy in general. In addition, topics covered in the media also affect what people discuss in private. Various crises in other countries have increased the focus on factors driving house prices.
To reveal whether the media attention is higher than other important topics, we have also looked at the media coverage of the oil price. During the couple of last year’s there has been a lot of focus on the oil industry due to the historical low oil price. In 2014, there were 3 383 articles that covered the term “oil price”, while 3 285 covered the term “house prices” and 696 covered the term “housing bubble”. However, it is important to emphasize that the strong development in technology also has made it easier to provide access to databases, which has made it possible for the media to continue producing information about the housing market. Nevertheless, a lot of attention is aimed towards the Norwegian house market, and we thus believe this criterion to be fulfilled.
House prices increase more than private income
House prices have increased more than disposable income, which indicates that houses are becoming relatively more expensive. Figure 6.5 illustrates that house prices have increased by 153
% since 2000, while disposable income has increased by 114 %. A significant increase in house prices compared to disposable income suggests that this criterion is fulfilled.
Figure 6.5: House price- and disposable income index Norway (1980=100)
Limited understanding of risk attached to the investment
An important factor when deciding to enter the housing market is consumer expectations.
Norwegian__citizens have_over_the_past_years experienced_that_housing_is_a_safe_investment associated with low risk (BoNord, 2013). However, this is not necessarily correct. The Norwegian economist Harald Magnus Andreassen wrote an article in 2007, stating that the real value of a house does not rise in the long-term. It is the rental income that provides long-term returns.
Today, many consumers lack an understanding regarding the interest rate. Expectations of a low interest rate have resulted in consumers issuing larger mortgage loans than they would otherwise, and actual low interest rates have made consumers able to actually issue these loans. Growing household debt in combination with low interest rates indicate that they are issuing higher loans
when the interest rate is low instead of issuing lower loans with higher monthly installments. If households are issuing large loans with a low interest rate, they might have problems when the interest rate rises to its normal level. Households may believe that today’s low level of interest rates, in addition to a favorable tax system, is sustainable in the future. Furthermore, larger parts of households in Norway have mortgage loans with a floating rate. Hence, an increase in the interest rate will rapidly lead to higher interest payments (The Financial Supervisory Authority, 2015). If the housing value decreases, people are having more debts than what the housing value justifies.
The development in debt levels provides information regarding households’ willingness to issue loans. The debt level, relative to disposable income, has increased significantly over the last 30 years, and is now at a record high level (The Central Bank of Norway, 2016). There are several reasons for this development. Among other, low interest rates and expectations of a long-term low interest rate are important factors (The Financial Supervisory Authority of Norway, 2015). Another underlying factor for this exponential growth might be due to the high growth in house prices.
The debt growth has increased significantly in Norway the recent years. This might indicate lower concerns regarding interest rate and borrowing costs. According to Morten Balterzens report
“Financial trends 2015”, Norwegian households’ mortgage debts are growing more than their income, which we will explain further in section 6.3.1. Another indication is the amount of interest-only loans, which may indicate limited understanding of risk for several reasons. Firstly, households should repay as much as possible when the interest rate is low, as they have more money to spend on repayments. Subsequently, when people choose to postpone their repayments even though the interest rate is relatively low, it may indicate that they have issued excessively high mortgage loans.
A research company named United Minds has on behalf of Intrum Justitia provided a European Consumer Paying Report in 2015, which revealed that 46 % of all Norwegians aged between 18 and 34 years are not able to pay unforeseen expenses equivalent to half a month´s salary without having to borrow money. Further on, the report states that 31 % of the population sometimes feels they have trouble getting money to suffice. Additionally:
• 20 % sometimes borrow money to pay their bills
• 42 % have paid one or more bills after the last day of payment
Based on the growth of debt levels, in addition to struggles to meet claims, this criterion seems to be fulfilled.
Simplified opinion regarding mechanics of the housing market dominates
This factor is closely related to the previous. It is important to understand the link between housing procurement and risk. Increased risk due to high debt might in the worst-case lead to forced sales of homes. The number of forced sales can be an indicator of significantly high housing investments, which may imply that people does not have a comprehensive understanding of risk. The figure below shows petitions for forced sales17 in Norway from 2008 to 2015.
Figure 6.6: Forced sales in Norway 2008-2015
Figure 6.6 illustrates that the number of forced homes increased after the financial crisis. The large increase was unusual, and most likely due to household’s personal finances (Oslo City Court, 2016).
In 2014, there was a decline in forced sales, and a further decline occurred in 2015. However, compared to the period before 2011, the number of petitions and cases of forced sales are considerably larger. Oslo City Court argues that Norway will experience an increase in the number
17 Includes forced sales from real property, housing associations and other.
of forced sales due to the uncertainty in Norwegian- and international economy (Oslo City Court, 2016).
Based on this, we believe this criterion to be fulfilled.
6.1.1 Conclusion of Case and Shiller´s criteria in Norway
The following table illustrates whether or not Case and Shiller’s criteria are fulfilled.
Criteria Fulfilled
The pressure of being a home-owner ✓
Widespread comprehension that it is profitable to own housing ✓
Widespread expectation of increase in house prices ✓
House prices receive much attention in media and private conversations ✓
House prices increase more than private income ✓
Limited understanding of risk attached to the investment ✓ Simplified opinion regarding mechanics of the housing market dominates ✓
Table 6.1: Conclusion Case and Shiller Norway
All the seven criteria are fulfilled. Accordingly, we can argue that the Norwegian housing market has indications of being in a bubble, based on the analysis of Case and Shiller´s seven criteria for a housing bubble. However, it is important to emphasize that this analysis is largely based on subjective and discretionary assessments, in addition to limited data access and general problems of quantitative measuring. Thus, it will be necessary to see this analysis in context with other analyzes in order to form a more certain and adequate conclusion.