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What if Real Estate Investors Are Looking at the Housing Market All Wrong?

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The biggest mistake real estate investors often make is ignoring the supply side.

That’s the view of Harvard Professor Edward Glaeser, who’s touring Scandinavia as a speaker at the annual Skagen Funds conference.

While economic analysis traditionally tends to look at the demand side of the housing market, ignoring the supply side could prove fatal, Glaeser said, warning of “unfettered supply” in China’s second- and third-tier cities. 

“By far the largest mistake that at least American real estate investors have made over the last 230 years is to pay too much attention to demand relative to supply,” Glaeser said in an interview in Oslo. “Over and over again they ignore the ability of unfettered supply to set prices.”

Glaeser’s visit to the region comes as both Norway and Sweden are seeing steep declines in housing prices after record low interest rates and surging prices sparked a building boom.

Boom and Bust

Norway house prices in negative terrain

Source: Finn.no, Eiendomsverdi, Eiendom Norge

The economist nevertheless says that both Sweden and Norway, and in particular their capitals, Stockholm and Oslo, are well-equipped to withstand a housing downturn.

“I have a very simple view of economic success, which is a combination of rules and schools, it’s about the quality of governance and about the quality of human capital,” he said. “Scandinavia at this point looks quite good along both of those dimensions. I would be quite cautious against betting against Scandinavian cities.”

The central banks of Norway and Sweden are also moving closer to an exit from stimulus, meaning higher rates ahead, but Glaeser said the impact on the housing markets could be limited.

“My estimates of the interest rate housing price relationship are relatively modest,” he said. “So a hundred basis-point swing is typically associated with a six to seven percent change in house prices.” 

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