This sector has experienced a complete reversal since September. Second-hand prices have fallen from their peak in August 2022 by 2.6 per cent nationally and 3.7 per cent in Oslo after adjusting for seasonal variation.¹ This is the fastest downturn since the 2008 financial crisis. The fall in house prices is likely to continue in coming months, for several reasons:

• Norwegian household debt has never been higher, and the interest burden has increased sharply since the beginning of 2022. Mortgage rates have roughly doubled over the past year, and are at their highest since 2014.² They are expected to reach about 4.3 per cent during 2023.³

• Household disposable real income is likely to have declined by 1.8 per cent in 2022 and to continue falling by 0.6 per cent this year before the trend begins to reverse from 2024. The size of mortgage offers has consequently reduced, not least following an extraordinary upward adjustment in figures from the National Institute for Consumer Research (SIFO) during September as a result of the high inflation rate.

• Unsold second-hand residential properties have increased substantially from August, and turnover time is lengthening. The stock at the start of 2022 was record-low, but grew substantially during the autumn.

Other factors pull in the opposite direction

Despite the many negative factors affecting the housing market at the moment, a number have also changed in a positive direction since the summer:

• The government has amended the mortgage regulations. From 1 January 2023, the interest-rate rise which the banks must apply when assessing a customer’s ability to service their debt has been cut from at least five percentage points to three. The special requirement for second-hand homes in Oslo has also been dropped. Viewed in isolation, this will make a positive contribution to price developments.

• Many residential projects are being put on hold because of high construction costs and falling house prices. Newbuild sales in November 2022 were down by no less than 39 per cent from 12 months earlier.⁴ As raw material prices fall even further, combined with smaller order backlogs at the contractors, construction costs are also expected to decline.

• Housing demand has increased substantially during recent months, both in Oslo and nationally. Ukrainian refugees accounted for more than half the net immigration to Norway in 2022, when almost 30 000 were received and housed.⁵ The government estimates that a further 35 000 will arrive in 2023. They are being accommodated across the country, so housing demand will rise on a broad basis. Only 26 per cent now want to return to their homeland when the war is over, and 20 per cent have already decided to remain in Norway after the conflict ceases.⁶

In sum, we nevertheless expect house prices to continue falling in coming quarters. This means that the decline from the peak could quickly reach the 10-15 per cent we estimated before last summer. However, the risk of a sharper downturn has decreased. The best estimate now is perhaps the lower end of the interval. On a national basis, we estimate that the decline will be somewhat lower. But several factors contribute to uncertainty. Even though the level of activity in the Norwegian economy remains high, the interest-rate rises have started to exert a tightening effect. The downturn could be more marked than earlier expected.

Despite the reversal in the housing market, several residential development properties changed hands during the autumn and winter. Based on actual transactions in the market, prices for attractive housing sites do not appear to have fallen this far.

Still difficult to achieve profitable residential rents

The relationship between house prices and rents tells us something about prices remaining stretched. To be sure, the decline in house prices has contributed to a rise in residential property yield. Rents are pulling in the same direction, since the rental market was very tight during the autumn. Rents for flats in Oslo rose by 5.8 per cent in the first three quarters of 2022.⁷

Residential rents are normally adjusted against the consumer price index (CPI) once a year, so that an increase is likely at the next review. That will help to increase the direct return on residential property investment in the longer term. The yield gap – the difference between implicit residential property yield and the 10-year swap rate – has nevertheless narrowed to a low level in historical terms. Although a strong rental market and high inflation are helping to increase cash flow, we are still a long way from the point where the level of income reflects the cost of capital.