Norway is apparently very happy but what about house prices?

Today we are taking a trip across the North Sea to what we are told is the happiest country on Earth. From the World Happiness Report.

Norway has jumped from 4th place in 2016 to 1st place this year, followed by Denmark, Iceland and Switzerland in a tightly packed bunch. All of the top four countries rank highly on all the main factors found to support happiness: caring, freedom, generosity, honesty, health, income and good governance. Their averages are so close that small changes can re-order the rankings from year to year.

As I note that Finland is 5th this seems to be a Nordic thing although of course it does make one wonder about the criteria as well as how many copies of this were sold there by Pharrell.

Because I’m happy
Clap along if you feel like a room without a roof
Because I’m happy
Clap along if you feel like happiness is the truth
Because I’m happy
Clap along if you know what happiness is to you
Because I’m happy
Clap along if you feel like that’s what you wanna do

There are clear economic influences here as we note that Africa is apparently “waiting for happiness” and intriguingly China is like this.

People in China are no happier than 25 years ago

But returning to Norway there are clear economic influences at play.

Norway moves to the top of the ranking despite weaker oil prices. It is sometimes said that Norway achieves and maintains its high happiness not because of its oil wealth, but in spite of it. By choosing to produce its oil slowly, and investing the proceeds for the future rather than spending them in the present, Norway has insulated itself from the boom and bust cycle of many other resource-rich economies.

There is a mixture of fact and PR release there so let us look further at the Norwegian economy. Oh and being the top of any list these days poses a question.

Economic growth

This from the Norges Bank last week is not especially inspiring.

In 2016, mainland GDP in Norway grew at the slowest rate recorded since the financial crisis. Growth picked up a little between Q3 and Q4 as projected earlier.

Norway Statistics tells us this.

Continued weak growth Mainland Norway: Growth in the gross domestic product (GDP) for mainland Norway was 0.3 per cent in the 4th quarter of 2016, slightly up from the 3rd quarter.

The annual rate of growth was 1.1% and if we look into the detail there was something familiar for these times.

Consumption of goods increased by 0.6 per cent, after having mostly fallen since the 3rd quarter of 2015. Increased car purchases contributed to more than half of the rise in household consumption of goods.

A hint of easy monetary policy which these days often appears in the car sector. Also something else seems rather familiar.

The declining wage growth that we have seen in recent years will continue, and estimates for 2016 show that the average annual wage growth was 1.7 per cent.

If we return to the Norges Bank report we see that real wages have fallen.

The consumer price index (CPI) rose by 3.6% between 2015 and 2016, while consumer prices adjusted for tax changes and excluding energy products (CPI-ATE) rose by 3.0% in the same period.

A lot of the impact here has been from the oil and gas sector.

What about monetary policy then?

Here we go.

Norges Bank’s Executive Board has decided to keep the key policy rate unchanged at 0.5%. The Executive Board’s current assessment of the outlook suggests that the key policy rate will most likely remain at today’s level in the period ahead.

So like so many other central banks they ignore inflation being above its target ( which is 2.5%) and concentrate on economic growth.

In the wake of the decline in oil prices since summer 2014, the key policy rate in Norway has been reduced in several steps. Monetary policy is expansionary and supportive of structural adjustments in the Norwegian economy,

So far the oil price and industry has been a silent elephant in the room but if we defer that to later let us look at the dangers from low interest-rates which are domestic debt and house prices.

House Prices

Today’s data release tells us this.

On average, prices for new dwellings have increased by 10.4 per cent in the 4th quarter of 2016 compared to the same quarter in 2015…….Prices for existing flats, small houses and detached houses have increased by 15.9, 9.9 and 7.6 per cent respectively from the 4th quarter of 2015 to the 4th quarter of 2016.

If we look into the detail we see that the prices for flats ( multi dwelling apartments) are driving this move. Let us remind ourselves that this compares with wage growth of 1.7% and real wages which are falling and it comes on the back of previous rises. The flats index was at 80 in the first quarter of 2011 and has risen to approximately 117. If we look back for what has happened in the credit crunch are we see that house prices have doubled since 2005 ( to be precise the index is 199.3).

What about debt?

The Norges Bank puts it like this.

Persistently low interest rates may lead to financial system vulnerabilities. The rapid rise in house prices and growing debt burdens indicate that households are becoming more vulnerable. By taking into account the risk associated with very low interest rates, monetary policy can promote long-term economic stability.

That lest sentence is a contradiction in terms designed to fool the unwary I think. We see that borrowing was on the march.

Net incurrence of loans increased from NOK 167 billion to NOK 186 billion, while net investments in deposits decreased from NOK 65 billion to NOK 55 billion.

Debt growth was 5.6% in 2016 and that left the debt to income ratio at 2.35.  Back to the Norges Bank.

Growth in household debt accelerated through the latter half of 2016, and debt is still growing faster than household income. The rapid rise in house prices and growing debt burdens indicate that households are becoming more vulnerable.

The mortgage rate series at Norges Bank was at 3.98% as 2013 ended and 2.49% as 2016 ended so we can see the pattern although the low was 2.35% last August. It is not a surprise to see money supply growth be firm.

The twelve-month growth in the monetary aggregate M3 was 6.5 per cent to end-January, up from 5.4 per cent the previous month.

The debt situation for the government is rather unique. It does have some but if you put in the sovereign wealth fund then net financial assets must be around treble annual GDP.

Comment

If we look at the elephant in the room then the oil and gas sector accounts for around 22% of Norway’s economic output. If we add in the fishing industry then Norway is especially gifted in terms of natural resources. The catch in recent times has been the fall in the price of crude oil which sees the Brent benchmark just above US $51 per barrel as I type this. In terms of an annual comparison the price is higher and Norway is one of the countries which most welcomes that but it is a far cry from the US $100+ of a couple of years ro so ago. This has been picked up in the unemployment data where the unemployment rate headed towards 5%. It has now fallen to 4.4% but there are other worries here.

the seasonally-adjusted unemployment decreased by 0.4 percentage points, or 12 000 persons………the seasonally adjusted number of employed persons decreased by 22 000 persons from September to December.

Meanwhile the central banks eases and pumps up the housing market. Maybe us Brits have set a bad example but what must first-time buyers and the younger generation think of this as a strategy?

Let me leave you with something very Norwegian.

A total of 30 800 moose were shot during the hunting year 2016/2017; a decrease of 300 animals from the previous hunting year and a decrease of 22 per cent from the record hunting year 1999/2000.

 

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11 thoughts on “Norway is apparently very happy but what about house prices?

  1. Great blog as usual, Shaun.
    The Norwegian CPI uses a rental equivalence approach to measure owner-occupied housing (OOH) so the big increase in housing prices isn’t reflected in it and neither of course is it in the HICP. The Norwegian HICP inflation rate was 2.7% in February 2017, down from 2.9% in January. However the quarterly OOH price index based on a net acquisitions approach had an inflation rate of 5.5% in 2016Q3, up from 4.7% in 2016Q2. The Norwegian central bank should not be using the Norwegian CPI as its target inflation indicator. A Norwegian HICP including an OOHPI component would show a higher and much more realistic rate of inflation.

    • Hi Andrew and thank you.

      This is a familiar tale where we are told there is little or no inflation because the official measures of it exclude where we find it ( asset prices) these days. Tomorrow the UK will put rental equivalence in its headline inflation measure as it switches from CPI to CPIH. The catch is that rather than using real numbers ( house prices, mortgage costs etc..) it fantasisies that people rent out the homes they live in! So I agree with you completely.

      • Rents are heading downwards, so a report last week claimed.

        It really is 2 decades too late to put housing in, in any way shape or form. Was only a few days ago the ONS stated house prices have never been more unaffordable in relation to wages.

        Perhaps they know its peak bubble and are looking for a reason to keep inflation down to give Carney and the free thinkers another excuse not to raise rates.

  2. We keep hearing how marvellous life is in the Scandinavian countries. Personally I don’t buy it, they always seem so glum when you meet them. Some while ago I worked for a Swedish insusrer for nearly four years and at one point was asked if i wanted to move to work in Uppsala. My (rather career limiting) reply was emphatically no thanks!

    I cannot think of a drearier set of countries, especially Finland. I thought the Finns were currently in an economic depression, Nokia is on its backside and unemployment rife, so why is everyone apparetly leaping around and singing with unbridled joy? Perhaps the answer lies in how these rankings are constructed and the populations’ fatilistic outlook on life. As a people they tend to accept their fate. One only has to think of the lryics of Lennon/McCartney to understand how two dimensional life can be;

    She told me she worked
    In the morning and started to laugh
    I told her I didn’t
    And crawled off to sleep in the bath

    And when I awoke I was alone
    This bird had flown
    So I lit a fire
    Isn’t it good Norwegian wood?

  3. ” By taking into account the risk associated with very low interest rates, monetary policy can promote long-term economic stability.

    That lest sentence is a contradiction in terms designed to fool the unwary I think. We see that borrowing was on the march.”

    I think not, they may be alluding to the ability to tighten reserve requirements and reduce QE, if they’re doing any?

    • Hi Noo2

      There isn’t really much scope for QE in Norway due to the low debt level. As they have already invested the Sovereign Wealth Fund you could argue a type of QE has already happened and is being added to. That leaves macroprudential policies but that relies on people forgetting that they failed when last tried in any size.

  4. Hi Shaun, I could not resist giving Ken Dodd a mention – still touring with his “Happiness” show at 89 years of age.

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