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Norwegian house price inflation may be easing already as the Norges Bank prepares to raise interest rates.
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Norwegian house price inflation, cited as a factor by Norges Bank as it prepares to hike rates for the first time in the cycle this month, looks set to slow sharply as monetary policy tightens, experts including a former Norges Bank researcher told MNI.
The prevalence of variable rate mortgages helps make Norwegian house prices very sensitive to policy rate changes, said Andre Kallak Anundsen, a former Norges Bank Senior Researcher and now Deputy Head of Oslo Metropolitan University's Housing Lab, and Anders Lund, research head at Eiendomsverdi, a provider of real-time house price data. Signs of cooling are already appearing in the market, they said, dismissing the idea that the country is experiencing a housing bubble.
"There is empirical evidence suggesting that house prices in Norway are very sensitive to interest rate changes," Anundsen said, "An interest rate increase, and expectations of interest rate increases, will no doubt have a substantial effect on house prices."
Norges Bank will revisit its projected rate path in the September Monetary Policy Report, with the June MPR showing the policy rate rising from zero to 1.5% by 2024, while house price inflation was forecast to slow to 1.0% in 2022 from 9.2% this year.
NORGES BANK WATCHING HOUSE PRICES
The liquidity effect of an actual rate increase matters more to house prices than changes to the projected rate path, according to Anundsen, partly because of a loan-to-income cap on mortgages and affordability tests to ensure households are able to withstand even very sharp rises in interest rates.
While house prices are not an explicit part of Norges Bank's mandate, its June policy statement cited the risks of a prolonged period of low rates fuelling financial imbalances and said policymakers "placed weight on the marked rise in house prices since Spring 2020."
Housing Lab estimates that house prices were some 10% overvalued in the first quarter of this year but does not consider that evidence of a bubble.
"I am not worried about the Norwegian house prices at all. I am very convinced that the main story here is the low interest rates," Lund said, with much of the explanation for price rises coming from the cut in the policy rate to zero in response to the Covid shock.
Recent data have shown house price inflation already fading, although there have been substantial regional divergences, with price growth higher in some areas outside the capital. Anundsen's research showed house prices move more strongly in response to rate cuts than hikes, particularly in places where supply is inelastic, such as in the Oslo region.
"Most of the effect of the interest rate cuts in 2020 has been passed through to the housing market by now," said Anundsen, adding that the anticipation of the looming rate hike may already have dampened price growth. But Norges Bank has good reasons to closely monitor the housing market, given its tight link to macroeconomic and financial stability, he added.