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Fast Comment NorwayPreview: Housing prices in May, manufacturing output in April

  1. Housing prices trending higher
  2. But the supply/demand balance and higher interest rates will have a dampening effect
  3. Manufacturing output probably rose in April
Housing prices (Tuesday) and manufacturing output (Thursday)
Next week we will see figures for housing prices in May (Tuesday), as well as manufacturing output in April (Thursday). As usual, the housing market will get the lion’s share of the attention. First things first: Housing prices rose by a solid 0.9 percent m-o-m (S.A) in April, clearly overshooting Norges Bank’s estimate of a monthly change of around 0.1-0.2 percent. Whereas we may see some moderation in May, owing to volatility, the trend has turned positive (chart 1). All told, the housing market has indeed experienced a soft landing. To recall, it was our clear understanding that 2016 was not a purely speculative bubble – although elements of that were present in Oslo. And so 2017 would be a rather soft correction; not a bubble burst. Furthermore, the said softening seen throughout 2017 was mainly due to a shift in demand, which must also be viewed in the context of tighter rules for mortgage lending. This is in contrast to speculation of a sudden rise in supply as the dominant factor behind the softening. Note that Oslo was the key market experiencing a price decline in 2017. But the monthly supply of housing units was not especially large relative to that seen since 2010 (chart 2) (relatively few months of 2017 were in the higher range). So far this year, we have seen a moderate upward trend in prices (S.A.) with Oslo at the frontier of the improvement.
We still believe housing prices will trend moderately higher
Attention is now turning to the further outlook. Here we have made a few key points: For starters, the price improvement in Oslo this year has been given a helping hand by a more limited supply of existing homes (chart 2). Second, the implication of a higher supply remains to be seen. Note that relatively few of the rising permits from 2016-17 have been completed at this stage (chart 3). As a consequence, the rise in new completions will become more pronounced in H2 2018 and further throughout 2019. There is currently debate about how much the supply in Oslo will actually increase, as the pass-through from permits to completions is far from perfect. Our calculations suggest around 3,600 units for Oslo this year and around 3,800 units next year (chart 4). This is not especially elevated compared to past highs. But one important factor has definitely changed, and that is population growth. In our view, too much emphasis has been put on debating the rise in new construction, whereas it has been slightly under-communicated how far below estimates population growth has fallen (chart 5). The decline in population growth from its highs is mainly driven by lower net immigration. This is also the case for Oslo, as shown in chart 6 (forget about net inflow from other regions, as that has for the most part been negative since the beginning of the 2000s). And extending Oslo with Akershus does not help the case, as the key dominant factor is, again, that net immigration has fallen off its highs (chart 7). So the main story should not be about new completions being around levels seen before, but rather that these levels are now elevated relative to population growth. Will this set off another round of price declines? We cannot rule out the possibility that housing prices will slide somewhat. But we do not believe there is scope for significant price declines. And to be clear, our best guess is for further, albeit moderate, increases in nominal housing prices. In order to trigger a significant housing price decline we would have to see some kind of shock, and most effectively a monetary policy shock (abrupt rises in interest rates). But that is not on the radar. It is well communicated that the key interest rate will rise in September, but Norwegian households should cope well with this rate hike. Further ahead, we also believe the monetary tightening cycle will be somewhat softer than what Norges Bank signalled back in March.
Manufacturing output probably rose in April
Manufacturing output was surprisingly weak in Q1, declining by 1.1 percent q-o-q (chart 8). This was driven by a price decline in January, as output was broadly flat through February and March. We believe the outlook is more positive, supported by robust manufacturing sentiment. As such, we believe output increased by 0.7 percent m-o-m in April.


Marius Gonsholt Hov

Senior Economist


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