The Norwegian Housing Market: Out of Balance or Fundamentally Supported?

Abstract

Intrigued by the extensive historical growth and recent development in real housing prices, this thesis seeks to study whether fundamental factors support Norwegian housing prices. As such, the purpose is to determine whether or not there is an imbalance in the market.
Firstly, this is analyzed through an investigation of fundamental factors that theory dictates to have an explanatory effect. The findings demonstrate that the development to a notable extent explains both the historical and recent development in housing prices. A stable increase in real GDP, low real after-tax interest rates, increasing real disposable income and decreasing unemployment, all point towards historically fair pricing. Yet, the rapidly growing supply and demand of credit has resulted in stricter regulatory forces, which in line with a recent hike in interest rates and increasing supply, is found to support the last couple of years declining to stabilizing growth.
Secondly, findings from the comparative analysis of eight Northwestern European countries illustrate that the determined peer group experience the same positive- and negative relationships regarding fundamental factors and housing prices. Moreover, Norway is found to relatively have the most substantial growth in real housing prices, while at the same time also relatively high real GDP, high real disposable income, low real after-tax interest rate and low unemployment rates.
Thirdly, all empirical models are able to detect historical economic downturns. However, the empirical results regarding the current housing market yield contradictive results. The application of the Hodrick-Prescott filter indicates an undervalued market, Tobin´s Q demonstrates an overvalued market, while the P/R ratio implies a marginally overvalued market. Despite these contradicting results, the use of three different models with varied methodology is found to enable multiple and valuable perspectives on the topic at hand.
In conclusion, the paper finds that fundamental factors largely support both the historical and recent development of the housing market. While the results from the empirical analysis, in total, indicate a slightly overvalued market, the findings from the thesis demonstrate there are no immediate signs of a bubble or imbalance in the Norwegian housing market.