norway and the housing market

Norway and the housing market Housing market lunch, London, 10/4 2014

Senior Economist Kjersti Haugland, DNB Markets

Norwegian home prices have risen strongly Higher purchasing power the major driver

50

100

150

200

250

300

1985 1990 1995 2000 2005 2010

Norway: Real Home PricesIndex. 1985=100. Selected deflators

CPI Building costsAnnual wages Disposable income

Source: EFF/finn.no/Eiendomsverdi/Statistisk sentralbyrå/DNB Markets

2

Backdrop: High growth, low volatility Unlike in the US, most Norwegians took part in the income gain

60

70

80

90

100

110

120

130

1990 1995 2000 2005 2010

Median Household IncomeReal income, 2005=100

Norway USA

Source: Thomson Datastream/Statistics Norway/DNB Markets

0

1

2

3

4

MainlandNorway

Sweden Denmark Euro zone USA

Real GDPPercentage volume change, 1990-2013

Average Standard deviation

Source: Statistics Norway/DNB Markets

3

Oil has boosted the economy Both through activity impetus and through increased profitability

0

10

20

30

40

50

60

70

1970 1980 1990 2000 2010

Oil and gas activityPercentage shares

GDP Gross investments Exports


60

100

140

180

220

260

300

Q1 1994 Q1 1999 Q1 2004 Q1 2009 Q1 2014

Terms of trade t-15=100Exports-/import prices

Denmark Sweden

Finland ML Norway

NorwaySource: Thomson Datastream/DNB Markets

4

60

62

64

66

68

70

72

74

76

78

1970 1980 1990 2000 2010

Norway: Wage sharePer cent

Mainland, total Mainland companies


-2

0

2

4

6

8

10

12

2000 2004 2008 2012

Compensation of employeesPct change y/y

Norway Trading partners

Source: OECD/Thomson Datastream/DNB Markets

High profitability led to high wage growth Wage shares in line with historical average

5

Oil boom fading, mainland growth below trend Investments to peak this year as oil price is set to decline to 80$/brl (real)

6

0

20

40

60

80

100

120

140

160

1994 1999 2004 2009 2014 2019

Spot Brent Dollar/barrel

FWD nominal pricesForecast nominal pricesForecast real prices (2013 USD)

Source: Thomson Reuters/DNB Markets

40

60

80

100

120

140

160

180

200

220

1990 1995 2000 2005 2010 2015

Norway: Oil investmentsBn 2011-NOK


-10

0

10

20

30

1985 1990 1995 2000 2005 2010 2015

Housing pricesPercent change y/y

Actual/estimate DNB's model

Source: EFF/FINN//Eiendomsverdi/DNB Markets

Home prices to edge down DNB Markets expect -8% over the next three years

7

Limited building boom in Norway Despite record-high population growth

8

0

10

20

30

40

50

60

70

1991 1994 1997 2000 2003 2006 2009 2012

Norway: Population and HousingAnnual change in 1000

Houses completed Population

Immigrants, net

Source: Thomson Datastream/DNB Markets

-40

-20

0

20

40

60

80

100

120

140

160

1991 1994 1997 2000 2003 2006 2009 2012

Ireland: Population and HousingAnnual change in 1000

Houses completed PopulationImmigrants, net

Source: Thomson Datastream/DNB Markets

Indebted households source of concern Ranks high in international comparisons

9

Expect lower credit growth Joint effort by authorities

• FSA guidelines

• Loan to value (LTV) 85%

• Debt-servicing capability. Must be able to tolerate +500 bp

• Must amortise > 70% LTV

• Bank regulations

• Higher capital requirements for banks, including counter-cyclical buffer.

• Fiscal policy

• Higher wealth tax on secondary homes

• +75bp increase in subsidized mortgage rates March 2014

• Monetary policy

- “Leans against the wind”

10

Households have net wealth Both sides of the balance sheet has increased

11

0

1000

2000

3000

4000

5000

6000

1981 1986 1991 1996 2001 2006 2011

Housing wealth and debtBn NOK

Housing wealth Debt

Financial wealth (FW) FW excl insur.claims

Kilde: Statistisk Sentralbyrå/DNB Markets

Oil fund important buffer Fiscal rule (4% of oil fund’s value) provides ample leeway

12

0

30

60

90

120

150

180

210

240

270

300

2005 2009 2013 2017

Norway: Structural oil-corrected deficit

Actual DNBM projection 4%

Source: Ministry of Finance/DNB Markets

0

50

100

150

200

250

1980 1990 2000 2010

Norway: Public wealthPer cent of GDP

Gross Net

Source: OECD/Thomson Datastream/DNB Markets

Summing up: Norwegian home prices…

• …are high, for good reasons. Reflects exceptional

economic performance throughout the past 20 years,

and high income growth.

• … are set to decline for the next three years (-8%),

as a the oil boom fades and fundamental drivers go

from being strongly positive to mildly negative.

Moderate income growth, higher unemployment and

increasing interest rates.

13

Memo: DNB Markets’ home price model Isolated effects

80

85

90

95

100

105

2012 2013 2014 2015 2016

Norway: Model for home pricesEffects of 1pp higher unemployment.

Ref.scenario=100

Model Exogenous housing stock

Source: DNB Markets

90

92

94

96

98

100

102

2012 2013 2014 2015 2016

Norway: Model for home pricesEffects of 1pp higher interest rate.

Ref.scenario=100

Model Exogenous housing stockSource: DNB Markets

14

Memo: DNB Markets’ home price model Isolated effects

90

92

94

96

98

100

102

2012 2013 2014 2015 2016

Norway: Model for home pricesEffects of 1% higher income. Ref.scenario=100

Home PricesDisposable income

Source: DNB Markets

15

6 normal annual salaries to buy a home in 2013 Highest since 1947

0

2

4

6

8

10

12

14

16

1930 1950 1970 1990 2010

Norway: Average home price/normal annual salary

Source: Norges Bank/Statistics Norway/DNB Markets

16

Price/income 15% above 28-year average Share of income spent on necessities (food, clothes etc) lower than before

60

70

80

90

100

110

120

130

140

1985 1990 1995 2000 2005 2010

Home prices1985=100

Price/Income Price/Income ex necessities


0

5

10

15

20

25

30

35

1970 1980 1990 2000 2010

Consumption of necessitiesPercent of total consumption

Food and clothes Housing, shelter and fuels, calc.


17

House prices are high compared to rents But Norwegian rental market is very small

0

50

100

150

200

250

DE IR IT US NL SP DK SW GB AU NZ NW

OECD: House price to rent ratioIndex. Average 1980-2012=100

Q3 2013 Highest ratio since 1980Source: OECD/DNB Markets

18

Stable relation between debt and housing wealth After decline during the 1990s

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1981 1986 1991 1996 2001 2006 2011

Households: Debt/housing wealth

Source: Statistisk Sentralbyrå/DNB Markets

19

Limited building boom in Norway Compared to Spain, Ireland and UK

20

0

2

4

6

8

10

12

14

Q3 1996 Q3 2000 Q3 2004 Q3 2008 Q3 2012

Housing investmentsPercent of GDP. Selected nations

Spain Ireland USA UK NorwaySource: OECD/Thomson Datastream/DNB Markets

Homes are affordable Affordability decreased for young households and Oslo residents in the 90s

Index fluctuates with

• Mortgage rate

• Home prices

• Median income

21

Memo: Housing affordability index (HAI) = (Median income/qualifying income) *100

• Qualifying income: after-tax income necessary to pay interest and principal on a loan with benchmark conditions for a standard dwelling.

• The standard dwelling for Norway is 85 m2 (for Oslo 75 m2).

• Benchmark loan conditions

- Loan amount is 80% of market value

- Market value is the size of the standard dwelling multiplied by the square metre price from the real estate industry

- Self-amortising loan with 30-year term

- Interest rate is Norwegian State Housing Bank’s 5-year fixed rate

- The indicator is at 100 when 25% of after-tax income is spent on interest and principal

- No account has been taken of lower principal repayments owing to longer terms and increased use of interest-only periods.

• Source: Norges Bank’s Financial Stability Report 2013

22

Interest rate burden set to rise to 10% in 2017 Debt ratio stabilises around 200%

0

50

100

150

200

250

0

4

8

12

16

20

1980 1985 1990 1995 2000 2005 2010 2015

Households' debtPercent of disposable income

Interest payments Gross debt (rha)

Source: Statistisk sentralbyrå/DNB Markets

23

Many ways to measure vulnerability 2.4% of households defined as “risky” by Norges Bank

24

Households are saving more than before We expect the saving rate to increase further this year

-6

-4

-2

0

2

4

6

8

10

1990 1995 2000 2005 2010 2015

Households' Savings Ratio, pct.

Total x dividends x dividends & pension premia


25

Households are saving more than before We expect the saving rate to increase further this year

0

500

1000

1500

2000

2500

3000

3500

2000 2002 2004 2006 2008 2010 2012

Households' financial positionNOK bn

Deposits Stocks Mutual funds

Cash and other Insurance Claims

Source: Statistics NorwayDNB Markets

26

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norway and the housing market

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