Norway Faces Housing Bubble as Krone Steals Policy Agenda

Norway Risks Housing Bubble as Krone Steals Agenda
Construction cranes and new apartment blocks are reflected on a glass wall on a walkway leading to the "Barcode buildings" development area of Oslo, Norway, on March 13, 2012. Photographer: Tomm W. Christiansen/Bloomberg

Norway is moving closer to a housing bubble as the central bank’s strategy of cutting interest rates to weaken the krone spurs credit growth and bloats property values.

A day after Norway’s financial regulator said the biggest domestic threat to the economy comes from an overheated property market as borrowers bet rates will stay low, Norges Bank Governor Oeystein Olsen on March 14 demonstrated he won’t allow further krone gains by cutting the bank’s main interest rate a quarter of a percentage point to 1.5 percent.

The country may already be in a housing bubble, according to Robert Shiller, the co-creator of the S&P/Case-Shiller home-price index who predicted the U.S. subprime mortgage crash. Policy makers should “start worrying now,” Shiller said in an interview in Copenhagen in January. Norway’s Financial Supervisory Authority this week told banks to build up their capital buffers to prepare for increased losses as low central bank rates continue to fuel credit-market imbalances.

An overpriced housing market “is one worry that we have, but we have to balance different developments,” Olsen said in a March 14 interview in Oslo. The bank “is aware when we set interest rates of the impact on housing prices,” though there’s no sign of a bubble “in the classical sense,” he said.

Norway’s interbank market is responding to the warnings. The difference between Norway’s three-month interbank offered rate and the country’s benchmark deposit rate widened to 83 basis points yesterday, compared with an average of 48 basis points over the past decade.

Debt-Free Government

The economy of the world’s seventh-largest oil exporter has steered clear of Europe’s sovereign-debt crisis. The government has no net debt and the biggest budget surplus of any AAA-rated nation, thanks to a $600 billion sovereign-wealth fund. Unemployment fell to 2.7 percent in February, Europe’s lowest rate, the government said on March 1. Norway, like Switzerland, isn’t a member of the European Union.

The country’s mainland economy, which strips out the effect of oil, gas and shipping, will grow 3.25 percent this year, the central bank said March 14. That compares with a Feb. 23 European Commission estimate for a 0.3 percent contraction in the 17-member euro region.

Norway’s wealth has attracted investors to its currency market, sending the krone to a nine-year high this month and limiting the central bank’s scope to raise interest rates.

Another Switzerland?

“There is no doubt that there has been significant strengthening of the krone,” Olsen said. “That is an important element” in determining rate policy, he said. In an interview today, Olsen said that “short-term investors” face a “risk that the krone weakens. We are not like the Swiss franc, we are not as voluminous, so the door is much more narrow than in Switzerland.”

The currency rose 0.1 percent against the euro as of 12:08 p.m. in Oslo today, to 7.5529. It was little changed against the dollar at 5.7779. On March 14, the day of the rate cut, the krone slumped 1.7 percent against the euro and fell 2.2 percent versus the dollar.

Olsen has sharpened his focus on the krone since the Swiss National Bank in September clamped down on currency speculators by pegging the franc to the euro. That sent investors fleeing Europe’s debt crisis to alternative markets.

“Let’s not hope Norway will be another Switzerland,” said John Hydeskov, chief analyst at Danske Bank A/S in London, in an e-mailed reply to questions. “A rate cut signals: ‘We are alert.’ They hope the symbolic value is enough.”

Debt Burdens

Meanwhile, private debt burdens continue to swell. Household debt will reach 204 percent of disposable incomes this year, the central bank estimates. That’s the highest level since at least 1988, when the bank started compiling the data. In the 1980s, just before a housing collapse triggered a 40 percent slump in average Norwegian house prices, the private-debt ratio was about 150 percent, Morten Baltzersen, director general of Norway’s FSA, said in an interview last month.

House prices, which haven’t declined on an annual basis since 2008, jumped 7 percent last month to a record, according to the Real Estate Brokers Association. Property values have risen almost twice as fast as disposable incomes since 1992, central bank data show. Shiller, who is also an economics professor at Yale University, warns property prices in Norway “have gone up more than they ever did in the U.S.”

New Guidelines

The financial regulator last year pushed through guidelines for banks, urging them not to grant loans that make up more than 85 percent of a property’s value. DNB ASA, Norway’s biggest bank, is “definitely applying the new guidelines,” said Thomas Midteide, a spokesman at the Oslo-based bank, in an e-mailed response to questions.

DNB said mortgage rates have risen to take account of higher market funding costs. The bank increased mortgage rates in May and November last year, by a quarter of a percentage point each time, Midteide said.

“Mortgage loans are financed in the international funding market, which definitely worsened last year, as risk premiums banks pay have doubled,” he said in an e-mail.

So far, stricter lending rules and banks’ efforts to pass higher funding costs on to clients have done little to cool the market. Real-estate brokers complain that they’re unable to satisfy buyers’ appetite for housing.

“There aren’t enough homes to meet the demand,” Rune Bertelsen, a sales manager at Eiendomsmegler1 in Stavanger, on Norway’s south-west coastline, said in an interview. He estimates prices will rise another 6 percent through December.

‘Really Hot’

According to Privatmegleren, another broker based in Stavanger, about 95 percent of houses for sale are bought between one week and a month after being put on the market.

“It is really hot, it is a good market,” said Janne Mette Bergesen, a sales manager at Privatmegleren. “It will stay like this for a long time. People want to buy a house, they don’t want to rent. It’s a good investment.”

Norway’s Financial Supervisory Authority disagrees, saying this week house prices may fall “markedly” once the market turns. That would have “substantial knock-on” effects on the broader economy, the regulator said.

In neighboring Denmark, where a housing bubble burst in 2007, the economy is still struggling to recover from the banking meltdown that followed. Home prices will have slumped 25 percent since the crisis started by next year, the government-backed Economic Council estimated in November.

Terje Bach, a sales manager at realtor Privatmegleren in Bergen, said Norwegian homeowners can probably tolerate price declines of as much as 6 percent. Some homeowners said they already smell a bubble.

Lennart Krohn-Hansen, a 28-year-old physiotherapist based in Bergen, said he’ll probably rent out some rooms in the apartment he bought this week after looking for eight months, to help cover the cost.

“Prices are just so high,” he said. “It isn’t realistic.”

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