UPDATED: Soaring residential real estate prices have sparked expectations that Norway’s record-low interest rates will rise at least once if not twice later this year. The housing market is hotter than ever, and experts view interest rate hikes as the only means of cooling it down and easing an affordability crisis.
“We expect ongoing growth in housing prices and lots of turnover,” Henning Lauridsen, head of the national real estate brokers’ association Eiendom Norge. His organization reported a wild market in February that resulted in average sales prices rising 9.7 percent over February 2020 and a startling 15.2 percent in Oslo.
“The way the situation is now,” Lauridsen told reporters, “only higher interest rates can dampen the powerful price growth in the housing market.” With Norway’s economy expected to surge when the Corona crisis eases and restrictions end, higher interest rates can also help it from overheating as well.
Local media have reported cases of brisk bidding for residential property, lots of homes being sold even before they’ve been widely advertised or shown, and high prices that some Oslo officials think are spinning out of control. In one case this past week, a tiny one-room unit measuring just 11 square meters (about 110 square feet) in Oslo’s downtown Vika district sold for more than NOK 2.3 million (USD 270,000). In another case, a rundown fourth-floor apartment in an old building measuring just over 40 square meters sold after brisk bidding for around NOK 4.6 million. It literally featured holes in the walls and even lacked a source of hot water, meaning lots of additional investment was needed.
That’s how willing, or desperate, buyers are for housing that will spare them from paying high rents for which they get no tax breaks and no investment potential. Even real estate brokers and bankers think the situation is veering out of control, though, and they’re actually seeking interest rate hikes to bring the market back into balance.
The supply and demand situation is currently out of balance indeed, with not nearly enough new housing coming on the market that could bring prices under control. In Oslo, where demand is strongest, it only took an average of 18 days to sell a home.
Economists agree that rates will rise
The chief economist at Nordea Markets, Kjetil Olsen, is among those predicting that Norway’s central bank will respond by raising its key policy rate (slashed to zero shortly after the Corona crisis began) sooner than expected. Norges Bank Governor Øystein Olsen has stated that rates will eventually rise, but probably not until next year.
“Norges Bank is probably beginning to get a bit worried now,” Nordea’s Olsen told financial news service E24 right after the new housing numbers were released. He noted that the housing price increase is once again much higher than the central bank expected. He later told newspaper Dagens Næringsliv (DN) that he predicts two interest rate hikes this year, perhaps in September and December, and at least three next year. Nordea thinks Norges Bank’s key policy rate will be around 1.75 percent by the end of 2023.
That’s still very low for those who remember double-digit rates in the late 1980s and 1990s and mortage rates of around 18 percent. Most important, indicates Olsen, will be the recovery of Norway’s economy in general. The current record-high unemployment and negative impact of forced business closures will ease if not end after most people get vaccinated and normality returns. That could allow Norges Bank to eventually reimpose the interest rates that were slashed after the Corona crisis began.
Kjersti Haugland, chief economist at DNB Markets, is also more certain that the central bank will raise rates. “If housing price growth continues at this tempo, there’s a risk rates will rise before December,” Haugland said. There are real concerns over debt growth, she noted, and risks of both a housing backlash or rapid growth that higher rates could rein in.
Lauridsen of the real estate brokers’ organization thinks the central bank should act: “In our view, it would be wise of Norges Bank to raise rates as soon as June,” he said.