Norway could be heading for a severe drop in real estate prices, economists warned on Thursday. Indebted households in the largest cities and Stavanger in particular appear to be most vulnerable if that happens.
Economists pointed to a “very high” debt ratio in Norwegian households and the economy’s heavy dependence on oil reveneue.
“If we have a severe drop in the oil price and it remains low, activity and oil investment will be affected,” Elisabeth Holvik of Sparebank1 told Norwegian Broadcasting (NRK). “Unemployment will rise and state revenue will drop. In such a scenario, home prices will also drop.”
Harald Magnus Andreassen, chief economist at Swedbank First Securities, predicted cities will be hardest hit.
“Where the real estate prices have increased the most, the drop will be the deepest,” Andreassen said, pointing to Stavanger, Norway’s oil capital. “Private property prices have risen insanely there.”
Andreassen and other economists interviewed by NRK’s website nrk.no declined, however, to predict when such a negative oil price effect might occur.
Migration to the cities is a strong factor, stimulating the local real estate markets but also making them more vulnerable if those who have moved to Norway decide to go home. Such a change could happen quickly, just like it did in other European countries when the finance crisis hit. Market mechanisms in Norway are different than in Spain, for example, but it would be unwise to rule out that similar things may happen in Norway, Andreassen said.
Currently, a barrel of oil costs USD 103. That’s still high in historic terms, but lower than prices have been, and some investors and analysts have predicted the oil price could fall to as low as USD 80.
Holvik of Sparebank1 warned of a rapid change of heart from greed to fear among homeowners and investors.
“There’s a lot of psychology out there. When everyone believes that prices will rise, there’s optimism. and people dare to buy and take on bigger loans,” she said. “When markets turn around, psychology will follow. People will want to sell their home before buying a new one. Then you’ll have a correction that feeds on itself, causing a price drop of 10 to 20 per cent.”
Such warnings echo recent predictions from the major banks in Norway. DNB Markets believes the prices will stay flat next year and drop in 2014. Meanwhile, Nordea Bank expected prices to level out this year. And none of those forecasts includes falling oil prices.
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