13 JANUARY 2024
By Ella Getz Wold
Two large shocks have rattled the macroeconomy over the past years. First, the pandemic and the international lock-down in early 2020. Second, the spike in inflation and interest rates in late 2021. Both events have shaped the development in the Norwegian housing market, although not in the ways one might expect.
After a small and short-lived decline in house prices as the economy was shut down due to the COVID-19 pandemic, the housing market aggressively rebounded – see Figure 1. From the first quarter of 2020 to the first quarter of 2022, nominal house prices increased by roughly twenty percent.
Inflation started to rise in 2021, and Norges Bank subsequently increased the policy rate from 0% to 0.25% in October the same year, in what would be the first of many interest rate hikes. Two and a half years later, the policy rate is now at 4.5%, with mortgage rates approaching 6%. The last time the policy rate was this high was more than fifteen years ago, right before the financial crisis. What happened to house prices as policy rates were increasing? Perhaps surprisingly, not much. In fact, house prices have stayed roughly at the same level over the past two years – see Figure 1.
Figure 1. Price index for existing dwellings. 2018q1-2023q3. Source: Statistics Norway.
While it is possible that a substantial house price decline is still in front of us, this scenario is looking less plausible as time goes by. What then, can explain the resilience of the Norwegian housing market? The demand for housing depends on numerous factors, several of which have contributed positively to house price changes over the past years. Thinking about the services that housing provides, the rental price has increased noticeably, especially for smaller units. Credit constraints have been loosened, as the so-called interest rate stress-test in the mortgage regulation was relaxed from January last year. Many households also had extra financial buffers left over from the pandemic, a period with record high saving rates. Last year saving rates plummeted to negative levels, indicating that those buffers are now being used.
Due to the relatively high inflation rate, real mortgage rates are well below nominal mortgage rates and were in fact negative up until Q2 last year – see Figure 2. How does the interplay between inflation and interest rates affect the demand for housing? High inflation reduces the real value of debt in the future, which benefits homeowners with large mortgages. However, a high nominal interest rate today increases the cost of managing that mortgage, especially in the presence of mortgage payment requirements.
As inflation has recently started to come down, real interest rates have increased rapidly. In fact, over the past two years, the average real mortgage rate has increased by almost four percentage points and is now about one percent.
Figure 2. Interest rates on new household loans with housing collateral. Inflation is the year-on-year growth in the CPI. Real mortgage rates are nominal mortgage rates less inflation. 2018m1-2023m11. Source: Statistics Norway.
What can we expect of the housing market in 2024? The forecasts vary from price declines to zero growth, to price increases. Much of the disagreement is reflected in different interest rate forecasts. Norges Bank has stated that the policy rate is likely to remain at its current level for some time, and their published interest rate path going forward entails one interest rate reduction in the second half of 2024. However, the market has priced in more interest rate declines. As of now it seems plausible that the interest rate top has indeed been reached, providing potential house buyers some certainty that their mortgage costs are not going to increase soon. However, interest rates could very well stay at their current, elevated level for some time.
Finally, it is worth noting that also changes to the supply of housing is likely to matter going forward, as the number of new building projects has plummeted. In fact, the number of new buildings initiated has fallen by more than 30% since the beginning of the interest rate hikes – see Figure 3. This is likely to put upwards pressure on house prices in the future, although with some time lag.
All in all, the outlook for the Norwegian housing market in 2024 looks mildly positive. The big question is not only what will happen to interest rates going forward, but also – given recent experiences – how interest rate sensitive will house prices be once interest rates start going down instead of up?
Figure 3. Building statistics. Building work started, dwellings. Dashed lines are linear trendlines for the indicated time periods. 2018q1-2023q3. Source: Statistics Norway.