Thursday 5 December 2013

Norwegian Housing Bubble Headed for Hard Landing

Just like in Toronto there was a housing bubble in Norway during the late '80s. In both cases property prices fell north of 30%. Fast forward to today, and once again a bubble has developed in both places.

As Norwegian real estate prices doubled over the past decade, many sounded the alarm bells. For instance IMF believed that the housing market in Norway was overvalued by 40% and both Roubini and Shiller labeled Norway a bubble.  Most recently Nordea, the largest Nordic lender, forecasted a hard landing in Nordic country as it expects prices to fall between 15% to 20% over the next two years.

Is Norway special or are they just as delusional as Americans were back in 2004?

Robert Shiller explains:

"I've been trying to understand and think about these things in psychological terms. So what is it with the Norwegians? Well, they have a kind of a superiority complex. First of all, they were smart enough not to join the European Union, and they don't bear any of the burden of the southern EU countries. And they have North Sea oil, and their economy looks good. So they just think they are immune from all the problems of the world, and people are coming into Norway for jobs. So it just sounds to them that their real estate ought to be booming...There is something about our culture at this point in history. The rise of capitalism all over the world has gotten people in a very speculative mode in lots of places, and we are all capitalists now in a much deeper sense than we ever were before."

Home prices in Norway grew by 29% since 2009 while Canadian property values went up by 25%. The graph below shows home price indexes for both countries adjusted for inflation since 1975.

Compared to Canada, Norway has a sovereign wealth fund worth over $500 billion dollars while our government is over $600 billion dollars in the red. However, household debt in Canada was just 163.4%  in Q2 2013 compared to 200% in Norway. Nevertheless real disposable income in Norway grew by 73% between 1993 and 2010 while in Canada it only grew by 21%. In my view both Norway and Canada will have the same destiny - a housing bust.


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