Although the number of second-hand homes for sale has risen a good deal in recent months, the availability of such residences is still lower than normal. The latest figures from Eiendom Norge show about 1 400 homes on sale in Oslo – 14 per cent below the November average in 2009-20.

New housing starts are not particularly high at the moment, either, and their pace has slowed sharply since 2017. Nor is there much indication that this position will suddenly improve a lot, since newbuild sales are relatively slow right now. They halved in Oslo from August to November compared with the same period of 2020.¹

Reserves of land in Oslo are moreover limited. The amount available is a matter of contention, and no exact figure can be given. If “commercially realisable within a reasonable time” is a criterion, however, the real reserve is in any event lower than 10 000 homes. By comparison, some 3 100 homes have been completed annually in the capital over the past 10 years.

Building costs up

Housing developers estimated that their total construction costs rose by about NOK 1 600 per saleable square metre or 3.4 per cent during the first half. This primarily reflected higher raw material prices, but increased freight rates and shortages of some worker categories also added to the rise.

We believe construction costs will continue to increase, since prices for many input factors have risen a lot and there is probably some time lag. In addition, many European factories are struggling with high energy prices at the moment.

On the other hand, many projects are likely to grind to a halt if costs rise a lot without the income side keeping pace. High land prices and lower margins for new projects have meant a number of developments are sensitive to higher building costs.

Uncertainty over housing need

How big the need for housing will be in coming years is determined by population growth. Many reports have been seen in the media about high net emigration from Oslo, and the flow of people out of the capital has definitively been strong.

Speculation suggests that this reflects a number of people adapting to a new everyday life, with more working from home, which makes it less important to live centrally.

However, we believe it is necessary to be cautious about drawing conclusions too early. First, movements into and out of Oslo have always been sensitive to the business cycle, and we have now had the biggest economic downturn since the Second World War.

Second, many students have stayed away because schools and universities are shut. Third, economic migrants have faced demanding conditions. 

And, fourth, Oslo has been hardest hit by the pandemic – not only in the form of infection, but also because public and semi-public meeting places are very important for the quality of life in a city. Many people have probably brought forward plans to move out which would have been implemented later in any event.

If population flows eventually normalise, it is not certain that the supply side of the housing market stands ready to respond.

Much depends on interest rates

Although the supply of homes, the labour market and population growth are important, much depends on interest rates. And Norges Bank raised its base rate to 0.50 per cent in December.

Great uncertainty has prevailed in recent weeks on future rate developments in the wake of increased infections, new mutations and strict infection-control measures. Although uncertainty about the interest-rate curve has increased somewhat, a broad consensus prevails that more rate rises are due.

While the interest burden on households will naturally grow in line with the central bank raising its base rate, it is likely in any event to remain moderate from a historical perspective. However, the debt burden – which includes repayment instalments – is at a record high.²

Even though the housing market is sensitive to interest rates, it does not automatically follow that rising rates will cause house prices to fall. The last time Norges Bank increased its base rate – by 100 bps from September 2018 to October 2019 – house prices rose by 4.1 per cent in Oslo and 2.4 nationally over the same period.³

Calculating the implicit yield decline, using indices for rent and house-price developments from Eiendom Norge, gives us a fall of around 30 bps in yield since 2020. This is thereby lower than most commercial segments, particularly logistics. The gap between office and residential yields remains at the same level we have seen in recent years.