Norwegian Housing: Bursting Bubble Or Gentle Landing?

Kristin Cecilie Landmark & Søren Silas Møller

Student thesis: Master thesis


Predictions regarding the state of the Norwegian housing market seem to divide experts more than any other topic. Since 1992, the average price per square meter for both apartments and houses have more than quintupled. Owner occupied housing have further given considerably high returns over the last years, with a constantly high demand. By analyzing the development in housing prices and the underlying fundamental factors, this master thesis seeks to determine whether the price development in the Norwegian housing market is sustainable. Denmark is used as a benchmark herein. A number of established theories are used to conclude on the state of the market, among them the Price-to-Rent ratio (P/R ratio) and Tobin’s Q. The P/R ratio suggests strongly overvalued housing prices. This finding is supported by the reciprocal ratio, estimating a return from renting out that is relatively low compared to the OSEBX. Tobin’s Q implies a state near equilibrium, mainly driven by substantial increases in the price of land. Construction costs have also increased significantly after the introduction of the TEK10 requirements for new housing. The expectation of households is an important determinant of the price development, measured by a trend indicator and reflected in mass media. The findings of oil and gas in the 50s have created an overall optimistic population. A causality analysis of housing prices and household debt determines that housing prices granger cause debt. Debt levels among Norwegians, particularly among the younger households, have grown largely over the years. A sensitivity analysis shows that any changes in interest rates would impose large financial risk for a great share of Norwegian households. Tightened regulation, through Basel III and altered guidelines from Finanstilsynet, might reduce the debt growth in the coming years. On the basis of the fundamental analysis, three possible scenarios for the development in the housing market have been sketched; a downturn, an upturn and a golden mean. A negative chock in the international economy, mainly considered realistic in the long run, could trigger a downturn scenario. An upturn in housing prices is supported by insufficient building activity, strong demand and population growth. In addition, Norwegians have experienced strong growth in wages, low inflation and low interest rates, strengthening the ability of households to bid up the prices. In the golden mean scenario, the price growth will slow down, allowing the general economy to catch up with the housing prices. This will essentially be relevant in the medium term. Overall, the analysis does not indicate any larger chances of a bursting bubble in the short- or medium term. Prices have however grown to a level where numerous households find it difficult to purchase and finance a dwelling, signifying an overpriced market. The current price levels are therefore not considered sustainable, and a smaller decline in prices is expected in the short- and medium term. This is likely to result in a gentle landing, rather than a bursting bubble.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2013
Number of pages146