The real estate market in Norway could find itself immersed in a price bubble. A growing gap between housing prices and the cost of rent could be the signal that this market is suffering from a strong imbalance and that the price correction in housing for sale is about to arrive. To this day, Norway has the largest gap in this regard.
This concludes a study on 20 advanced economies of Moody's Investors Service that analyzes the dynamics between home prices and what it defines as a market equilibrium.
The reasoning is that when the rise in home prices does not trigger movements in the rental market, it can be a sign that families may have unrealistic expectations that prices will continue to rise, a common sign of a bubble in the housing market, says the credit rating agency.
Adverse economic effects
"Countries where housing prices and rents are unbalanced and adjusting slowly present a higher risk of suffering adverse economic effects from high house prices," wrote Emilla Gyoerk and Collin Ellis, two Moody's Investors Service analysts.
The real estate market of the richest economy in Scandinavia recorded a surge of prices in recent years due to interest rates at record lows and a huge government fiscal stimulus. Now its market presents the highest overvaluation after Belgium, Germany, and France, where prices seem to be the "most exaggerated," according to Moody's.
More importantly, Norway also has the largest share of homeowners among the countries surveyed, at almost 85%, which suggests that a price correction could "have a broad adverse effect on the economy, financial stability, and the credit conditions," says Moody's.
In addition, now the market is showing signs of cooling, which raises concerns about the possibility of an economic downturn. A rapid fall in prices this year reversed its annual progress in the face of a sharp increase in the supply of homes and the rush of buyers to sell.
Norway, whose real estate market has been overvalued since 2010, is the "most vulnerable" of the countries analyzed, Moody's says. The regulator of finances agreed: last month he said that housing prices and family debt are the main risks to the economy.
The OECD also said this week in a report that the government should prepare for a possible correction in housing prices and said that "they seem overvalued."
For now, the Norwegian central bank remains calm. Its president, Oystein Olsen, who last week hinted he is preparing to raise interest rates from next year, says he anticipates a "soft landing."
In addition, the Nordic economies have a great advantage. Their strong safety nets work as containment meshes for people with financial difficulties. Norway also has a sovereign wealth fund of one trillion dollars, which would not lack funds if the safety net had to be reloaded.
The above article was written and published in Spanish and has been translated into English. Click here to read the original article.