**10. Applying the Data into the “X-Factor”**

**10.2 Results from the Additional X-Factor**

Based on the thorough analysis of fundamental factors affecting the housing market in Oslo, we have chosen five factors to be implemented in our model, as described in chapter 10.1. The results from our additional X-factor are presented in Figure 10.1. The new model will be compared to the original fundamental P/R-ratio and evaluated in relation to the real P/R-ratio.

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Source: Appendix 25

From the graph, we observe that our additional factor mostly increases the original fundamental P/R-ratio. The additional factor has captured the characteristics of the housing market in Oslo, where the new X-factor is in compliance with how the chosen fundamental factors have contributed to increasing house prices. Accordingly, our new fundamental P/R-ratio are above or equal to that of the original fundamental P/R-ratio. Furthermore, we see that both fundamental P/R-ratio models give the same result from 1988 until 1993, while the new fundamental P/R-ratio is slightly above the original model until 2003 and have since then, with few exceptions, been above both the real and the fundamental P/R-ratio. However, for the housing market in Oslo, most of the changes in the chosen factors have resulted in a positive additional factor, supporting the increase in house prices.

We see that both fundamental P/R-ratios are affected by changes in the underlying fundamental factors to a greater extent than the real P/R-ratio, as they are more volatile. The fundamental P/R-ratios react instantly to changes in the factors of the ratios, as this theoretical model is static, compared to a dynamic market. Both ratios portray steeper changes than the real P/R-ratio. The main cause can be more slow response in the market to shifts in the economy, creating a lag in the development of the real ratio. In addition, the real P/R-ratio takes all conditions in the market into account, such as household’s expectations of future price movements. The combination of all factors affecting the housing market makes the development less volatile.

**Figure 10.1 Development in Nominal Real P/R, Fundamental P/R- and New Fundamental P/R-ratio 1983-2015 **

The Period from 2004 - 2008

First, the new model predicts a fall in house prices after 2005, where the original fundamental P/R-ratio starts to decline in 2006, together with the real P/R-ratio. The new fundamental P/R-ratio thus points out that the combination of fundamental factors between 2005 and 2006 should imply a fall in the P/R-ratio. The peak before 2005 was, according to our model, based on a high growth in replacement cost, GDP and disposable income. In addition, the importance (weight) of the population growth was changed from 2 to 2.5 between 2004 and 2005.

The new model shows a shorter period with overvaluation in the market, relative to the original P/R-ratio, in addition to having a smaller deviation to the real P/R-ratio. This difference indicates that there were other fundamental factors that affected the house prices. The new fundamental P/R-ratio did probably not fall as much as the original fundamental P/R-ratio because of the high increase in site cost and disposable income, in addition to a quite large increase in population. These factors likely contributed to reduce the decline in the real P/R-ratio, thus showing that the new fundamental P/R-ratio show a more correct picture of the situation.

Further, both the original and new fundamental P/R-ratio started to climb again before the real P/R-ratio. This can indicate that it took some time before positive signals in fundamental factors had an influence in the housing market. Hence, the real P/R-ratio declined further, even though fundamental factors suggest otherwise. The new P/R-ratio grew earlier than the original, as more fundamental factors are included and supported an increase in the real P/R-ratio.

The Period from 2009 – 2015

We observe a fall in the new ratio between 2008 and 2009, while the original ratio illustrates a steady increase in the ratio. The decline is, according to our model, due to a rather high increase in the unemployment rate, and also a reduced GDP.

According to theory, if the real P/R-ratio is above that of the fundamental P/R-ratio there are bubble tendencies in the market, as the P/R-ratio is no longer supported by fundamental factors. The original fundamental P/R-ratio signaled an overvaluation between 2011 and 2013, while the new ratio shows that the growth is supported by fundamental factors. As a burst of a housing bubble is not observed in Oslo between 2011 and 2013, this indicates that the new fundamental P/R-ratio presents a more accurate P/R-relationship. Hence, by including local factors for the housing market in Oslo, the new P/R-ratio is able to emphasize the characteristics of the house market in Oslo and thus better capture the substantial price growth from 2012 until today.

After 2013, the original fundamental P/R-ratio is close to the real P/R-ratio, indicating that the original P/R-ratio supported the development in the real ratio. However, as the real P/R-ratio is so close to the original fundamental ratio, it indicates that it is on the boarder of being overvalued, thus illustrating a greater risk for a housing bubble than our new model. Nevertheless, from 2014, the deviation between the real P/R-ratio and the original fundamental P/R-ratio increased. The deviation between our model and the real P/R-ratio is even greater, caused by a high population growth, together with an abnormal growth in replacement cost, resulting in a classification of 5. Thus, according to both our model and the original fundamental P/R-ratio, there are not bubble tendencies in the current housing market in Oslo, as the growth is supported by fundamental factors.

The new model can also be seen in relation to Case & Shiller’s prediction of a housing bubble since 2012. It emphasizes an even stronger correlation between the fundamental factors and the growth in house prices than the original fundamental P/R-ratio. Accordingly, there is a strong coherence between the fundamental factor analysis in chapter 8 and the results of our model, both supporting the house price development in Oslo. Expectations of future price growth and other psychological factors pointed out by Case and Shiller is likely present, but the growth is not grounded solely on expectations of future price growth.