The downturn was about as short-lived in the housing market as it was in the financial market. After a moderate fall during March and April, price growth had resumed as early as May. We think a lot of factors favour a continued rise in house prices during coming quarters.
At present, the decline in interest rates is naturally the big driver after the central bank reduced its base rate by a total of 150 basis points (bps) this spring. According to calculations by the housing lab at the Oslo Metropolitan University, a one-percentage-point alteration in lending rates, viewed in isolation, leads to a change of about 14 per cent in house prices.
Theoretically, therefore, the interest-rate reduction this spring should potentially have yielded a growth of about 20 per cent in house prices. In fact, they have risen since April by 9.3 per cent in Oslo and 6.6 per cent nationwide.¹Source: Eiendom Norge
House prices also appear to have some upside from a yield perspective. Market rents for flats in Oslo have risen by 1.4 per cent since the first quarter.² House prices are now 6.3 per cent higher than in February, corresponding to an implicit fall of about 15 bps in yield. This is moderate compared with what we have seen for attractive commercial properties, where yields have typically declined by 30-40 bps*Calculated on the basis of the Eiendom Norge housing index and 15 per cent owner cost.
Sources: UNION, Eiendom Norge and DNB Markets.
Naturally, house price developments are not only a function of interest rates, and other factors pull in the opposite direction. First, the residential mortgage regulations will probably help to suppress price growth to some extent. In many cases, a greater ability to service a mortgage because of lower interest rates does not translate into increased purchasing power because borrowing is limited to five times income. This restriction applies to a growing number of housebuyers because house prices have grown more than pay over time.
Second, the Norwegian economy is still affected by the pandemic and unemployment is 1.2 percentage points above the February rate.3 Developments in the labour market have nevertheless been much better than many feared when the jobless rate was over 10 per cent in April. Unemployment is also unequally distributed. Sectors with many young and unskilled workers have been particularly hard hit. The proportion of these groups living in rented accommodation is much higher than for the general population.
The supply side is becoming steadily tighter as the number of unsold homes has continued to decline. Oslo currently has about 1 400 of these – higher than in October 2016, the last period with strong price growth, but much lower than in the same month during 2017-19.Source: Eiendom Norge
Looking ahead, the supply side will probably remain relatively tight. Construction starts for new homes have declined dramatically in recent quarters, which means the number of completions will eventually get ever smaller. With fewer newbuilds on the market, the fight over second-hand homes is likely to become tougher.
All in all, we therefore believe that conditions are very favourable for a continued rise in Oslo house prices over the coming year.
Housing development property
Investors have a big appetite for housing development properties. Excluding portfolios and large company transactions, relatively few pure housebuilding sites have come on the market in recent months. In other words, hard battles are being fought over the land which does come up for sale.
Land prices have by and large been stable in central areas of eastern Norway over the past two years. The main explanation is that construction costs have risen considerably, partly as a result of growing activity in both house and commercial building. However, substantially fewer projects are being started today, and we are eventually likely to see a downturn on the construction side.
With rising house prices, downward pressure on construction costs and relatively little land on the market, we expect attractive housebuilding sites to increase in value.
Several housing development properties and companies have changed hands this year. Telenor Eiendom and Telenor Pensjonskasse have sold a portfolio of 85 development properties to an industrial investor consortium put together by Pareto for NOK 1.4 billion. Another example is the purchase of Veidekke Eiendom by Norwegian Property, Fredensborg Bolig and Union Real Estate Fund III. In addition, it recently became clear that Profier Gruppen has acquired Neptune Properties, and the NRK site at Marienlyst in Oslo was sold to Ferd Eiendom last winter as previously reported.
¹Source: Eiendom Norge (at Oktober 2020)
²Source: Eiendom Norge