If we look to the Nordic region then it is not just the weather that can be icy cold. The world on interest-rates has also dipped more than its toe into icy levels of interest-rates in that part of the world. Here the acronym ZIRP (Zero Interest-Rates Policy) has mostly been found to be outdated and replaced by NIRP (Negative Interest-Rates Policy). It has been one of the themes of this blog discussing the implications on Denmark where interest-rates have been cut to -0.75%, Sweden where they are -0.35% and Finland where they are -0.2%. Even in oil rich Norway we saw this back on the 17 th of June.
Norges Bank’s Executive Board decided to lower the key policy rate by 0.25 percentage point to 1.00 percent.
Of course there are plenty of ongoing issues for Norway as I note that the price of Brent Crude Oil has fallen this week to US $50 per barrel. Commodity price disinflation is no fun at all if you are one of the commodity producers. Also I note that we were also told this.
The Executive Board’s current assessment of the outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the course of autumn.
Let us now move on to analyse the impact of such low interest-rates which vary from 1% (and likely to fall further) to -0.75%.
The Norges Bank stated its concerns as it cut interest-rates.
House price inflation has moderated in recent months, but there are wide regional variations. Household debt is still rising faster than income. The low-interest rate level is contributing to sustaining the rise in house prices and debt.
You may note that they are admitting to pumping up both house prices and private debt. Let us look at the latest data.
House prices in Norway increased on average by 6.6 per cent from the 2nd quarter of 2014 to the 2nd quarter of 2015. In Bergen and Oslo, houses prices had the highest increase in this period, with 10.1 and 10.0 per cent respectively. In Stavanger, the prices fell by 3.7 per cent.
So we see something familiar in these times which is a house price surge in a capital city, in this case Oslo. I also note that the overall index is held down by the consequences of the oil price fall as the “oil town” of Stavanger sees house price falls.
If we look for context the house price index where 2005=100 started in 1992 at 34.3 and is now 185.3. So we are seeing house price rises on top of previous rises in a so far reach for the sky style move with only a brief flicker for the onset of the credit crunch. According to the Financial Times there was a record number of dwellings sold in June so unlike the UK for example volumes are accompanying prices. Also there was this.
Anecdotal evidence backs this up. The former home of the Soviet spy Rudolf Abel in an Oslo suburb sold for NKr6.1m ($750,000) this year, well above the NKr4.2m asking price
Londoners in particular will recognise such a pattern.
We get a clue to the state of play here from this in the Financial Times.
Magdalena Andersson, Sweden’s finance minister, called a 13 per cent rise in house prices in the year to May a “worrying development”.
The official data is up to the end of the first quarter of this year and shows the rate of increase of house prices to be 9% and the index (1981=100) to be at 619. So again we note it is a country which has already seen considerable rises in house prices.
The Riksbank is aware of the dangers here as these excerpts from the July Minutes indicate.
Mortgage lending is increasing far too much. The real economic situation will normalise by the end of next year but this will happen at the cost of ever greater risk-taking on the mortgage market.
Also we see some quotes which are blatant contradictions.
The household debt ratio (debt as a percentage of disposable income) is expected to rise somewhat faster in the short term……….However, the high level of indebtedness needs to be dealt with now.
As mortgage rates in Sweden are mostly at variable rates then there is no avoiding the fact that an official interest-rate of -0.35% accompanied by ever more QE to reduce bond yields will put downwards pressure on mortgage rates and more upwards pressure on house prices.
The Riksbank seems to have suffered some amnesia about its worries in April.
These are coupled, for instance, to household indebtedness and the rapid rise in housing prices.
What could go wrong?
The Danish central bank posted a warning in its latest Monetary Review.
The fall in interest rates in the first part of the year boosted house prices in the spring. The level of interest rates remains low, thereby supporting house prices. Consequently, there is still reason to exert caution in relation to house prices, especially in Copenhagen, where there is a risk that price increases are self-reinforcing.
The capital city effect again which is a theme of these days and the FT explains it thus.
Apartment prices in Copenhagen have risen by a quarter in the past year and are up by about two-thirds since 2011, according to data from Danske.
That is about as bubblicious as we are currently seeing and of course in a country that saw a boom that turned to bust as the credit crunch hit then it would appear that memories are very short. With the official interest-rate at -0.75% then there is food for thought from this. As Bloomberg points out the Danes do have a taste for personal borrowing.
The country’s households, which carry the rich world’s biggest gross debt loads relative to disposable incomes…
Also it is unusual on two counts to see words and phrases like this from a central bank.
There are indications that recent developments in the Copenhagen market for project sales resemble the situation prior to the housing bubble in 2005-07 somewhat.
Firstly “housing bubble” is usually avoided like the plague and added to it is the admittal that one is happening now.
Just to cover off the area we are seeing a different situation in Finland.
In the first quarter of 2015, prices for old single-family houses fell by an average of 1.3 per cent from the previous year in the whole country. In Greater Helsinki, prices went up by 3.0 per cent from the corresponding period of the previous year, while in the rest of the country they fell by 1.8 per cent.
The capital city effect is still there but at a lower level. I guess we are seeing a combined effect here. I have written recently about the struggles of the Finnish economy in the last three years and for now they are outweighing the impact of lower mortgage-rates. So it is a case of watch this space.
International bodies are starting to look at house price developments in Scandanavia. The IMF pointed this out in May about Norway.
House prices rose rapidly over the last decade and most estimates suggest that house prices are significantly overvalued.
If we move to the OECD then its figures will be behind recent developments but even so house prices are 63.6% overvalued compared to rents and 21.9% overvalued compared to income. The numbers for Sweden are 33.8% and 22% respectively and Denmark is at 12.1% and 7.9% which means that the bust which followed the boom didn’t really have much of an impact at all on future behaviour and apparently taught few is any lessons.
In essence here the part of domestic monetary policy which relates to house prices has been subjugated to exchange rate policy in Sweden and Denmark with Norway struggling to find a way of dealing with an oil price which has more than halved. However if we return to the institutional view you may note that they would presumably be happy if the prices could rise forever as the only apparent fear is of future falls.
A significant reduction in property prices could occur.
Those who are struggling to buy as house prices accelerate away would welcome such a development! First time buyers get forgotten in all of this as house price rises blast away from both wage increases and ordinary inflation. We have another outbreak of the war of the generations as the mostly older feel wealthier and the most younger see a future either filled with debt or one where house prices are out of reach on ordinary incomes. As house prices rise the experience sooner or later is that rents tend too as well so there is little opportunity for escape.
One way of helping to stop this mess is to explicitly put house prices in the various headline consumer inflation indices. Regular readers will know that this is one of the themes of this blog. It would not solve the problem but it is one of the pieces required in my opinion. Otherwise central banks are allowed to present inflation rises as a wealth increase and we will have to keep playing Biffy Clyro.
You are creating all the bubbles at night
I’m chasing round trying to pop them all the time
We don’t need to trust a single word they say
You are creating all the bubbles at play