OSLO Jan 10 Norway's overvalued housing market looks to have avoided a crash as the nation's immense saved-up wealth cushioned the economy, but the property market is set to struggle in 2014.
That could dampen growth in what was once seen a model economy.
Prices could fall just one to three percent this year, experts say, confounding some earlier expectations for a 10 to 20 percent drop, as the fundamental drivers, from high immigration to low unemployment and record oil investments still support the market.
The property market appeared close to the brink late 2013 after three months of price falls and with the IMF arguing that the market was 40 percent overvalued, Norway faced the risk of a crash similar to neighbouring Denmark, where prices dropped over 20 percent around 2008, holding back growth and consumption ever since.
"There is a bit less momentum in the economy now than last year," Rune Bjerke, the Chief Executive of DNB, Norway's biggest bank told Reuters. "But there's positive growth, only a slight increase in unemployment, interest rates remain low so there's little reason to fear a drastic drop in housing prices."
Experts from realtors to the central bank now see prices down around 2 percent on average this year after the market rose unexpectedly in December and household credit growth stayed at 7 percent in November, a benign annual drop considering last year's 4.9 percent average increase.
Builders say they will slow down construction work to reflect easing demand but crucially, key projects remain active.
"We have not cancelled any projects, but we have adjusted down our production capacity somewhat and prepare for a flat market in 2014," Ole Feet, the CEO of property developer BWG Homes said.
"As long as the government makes financing available and eases the regulation for mortgages, we think the market will stabilise," Feet said. "The market is quite balanced, so we see no reason to expect a steep fall ahead."
A year ago Norway was Western Europe's fastest growing economy, thanks to its immense oil wealth and a rainy day cash reserve worth 170 percent of GDP.
But the economy eventually succumbed to Europe's plight as export markets struggled, competitiveness stagnated, a strong currency bit into profits and growth in the oil sector started to slow. And the problems came just as the government was tightening bank regulations, pushing up mortgage costs.
"It is important to remember that we have had strong growth in housing prices, and it is not unusual to have a shift after a period of growth like that," Prime Minister Erna Solberg told Reuters.
"We are committed to maintaining stable house building in the years to come, and that is why we focus on measures to simplify building regulation in order to speed up the building process," she added.
NOT OUT OF THE WOODS
Norway's house prices have risen by about a third since 2010, pushing household debt to nearly 200 percent of disposable income, usually seen as a risk factor as drops in home prices can quickly feed into sentiment and consumption.
But along with the massive wealth fund built up by the government, households have also lifted their savings in recent years. Norwegians' savings ratio hit close 9 percent last year, above the euro zone's 7.9 percent and twice the average of the United States, giving families a large cushion to tolerate house price falls.
The house price fall, even if small, will still weigh on the economy, keeping consumption and lending growth down, increasing the pressure on the government to step in.
The Norwegian Homebuilders' Association said that under a worst case housing starts could fall to 15,000 this year from last year's 26,000 and the government needed to change regulations to raise the maximum level of mortgages to 90 percent of home values from 85 percent.
"The situation is now so serious that we're challenging Finance Minister Siv Jensen to cut the equity requirement to 10 percent," Per Jaeger, the lobby group's head said.
The government, however, has not committed to any large measures even though it won elections in September partly on promises to make home buying easier.
Household consumption growth is seen falling to 1.75 percent this year, nearly half of the 2012 growth rate while GDP on the mainland, or excluding the offshore oil sector, will expand by 2 percent after 3.4 percent in 2012.
And the 43 percent drop in housing starts in November indicates that developers could still quickly adjust their plans if the market sours.
But for now, the market may be over the worst.
"Slower growth in prices for existing homes is a healthy development, but there are no economic factors to support a lasting fall," Aage Pettersen, a spokesman at OBOS, the largest Nordic cooperative building association, said. "It is not certain that we will sell fewer new houses in 2014 than we did in 2013. (Writing by Balazs Koranyi; Editing by Toby Chopra)