Wednesday, 24 October 2012

Norwegian House Prices increase 7% in Q3-12, further inflating the bubble

House prices, as measured by the Norwegian House Price Index compiled by Statistics Norway, increased 7.0% on last year in Q3 2012. House prices was up on last year for the 13th quarter in a row averaging a 7.9% YoY increase during those quarter. YTD the house price index is up 6.7% on last year.


The increase in house prices is partly fuelled by historically low interest rates on mortgages (driven by a low key policy rate set by the central bank of Norway, currently 1.5%) and a low interest rate on deposits which barely covers price inflation as measured by the CPI. The latter means traditional bank savings is less attractive than it otherwise would have been had interest rates been higher which again means its relatively more attractive to put savings into property instead (as Bernanke said, house prices never decrease, right?).

Source: Statistics Norway

The savings rate in Norway since 2009 has been relatively low compared to many OECD countries, especially when one takes into consideration that Norway is amongst the wealthiest countries on earth. Based on statistics from OECD, the average household savings rate in Norway of 7.4% for the period 2009 to 2012 was only 1.4 percentage points higher than the average for OECD countries. During this period, countries like Ireland, Slovenia and Sweden had substantially higher savings rates than Norway. As of Q2 2012, households gross debt to disposable income was 1.83. Together with substantial increases in money supply and fiscal policy stimuli through running massive budget deficits, the Keynesian driven policies in Norway, which encourage spending and not saving, these factors facilitate the formation of a house price bubble in Norway.


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