Norway’s Strongest Housing Market Since 2016 Stokes Rate Bets

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Norway’s house prices reached the highest level in five years, adding pressure on the central bank to raise interest rates well before peers with a move as soon as the second half of 2021.

The cost of a home rose 1.3% this month from January, the biggest increase for a February since 2009, according to Real Estate Norway, Eiendomsverdi and Finn.no. Annual gains exceeding 10% in several areas, including a 15% jump in Oslo, signal the strongest market since 2016, said Henning Lauridsen, the chief executive officer of Real Estate Norway.

Norway’s economy ended 2020 only 1.4% smaller than before the crisis, resilience that has already made the oil-rich economy stand out among wealthy nations as the most likely to lift borrowing costs first. Soaring house prices have prompted investors to cement bets that Norges Bank won’t wait until the first half of next year to raise the benchmark rate from zero, as it currently plans.

“In essence, it is only rate hikes that can dampen house price growth now,” Swedbank analysts Oystein Borsum and Marlene Skjellet Granerud, said in a report, adding that they expect the first increase in the second half of 2021. The central bank’s next monetary policy meeting is on March 18.

Norway’s central bank hasn’t faced pressure to deploy unconventional measures to counter the pandemic, unlike counterparts in the euro area and neighboring Sweden. Fiscal policy has borne the brunt of stimulus, underpinned by record withdrawals from the nation’s $1.3 trillion wealth fund.

What Bloomberg Economics Says...

“Most of the world’s governments and central banks are in the throes of steering unprecedented rescue programs to combat the impact of Covid-19. But there’s one major central bank preparing to withdraw stimulus -- Norges Bank.”

--Johanna Jeansson. For full note, click here.

Against that backdrop, Norges Bank is watching the real-estate market closely. “Rapidly” rising house prices and further household debt growth pose “a particular risk” of financial imbalances building up in the low-interest rate environment, Governor Oystein Olsen said in his annual speech last month.

Nordea analysts Kjetil Olsen and Dane Cekov said in a report that they expect Norges Bank to signal an interest-rate increase in September or December. Apart from house-price growth clearly exceeding its forecasts, they listed the following reasons to support their view:

  • Better-than-expected roll-out of the vaccines
  • Oil prices clearly higher than expected
  • Inflation has exceeded forecasts
  • Forward rates abroad have increased
  • Norwegian Krone remains weak

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