Bubble Index

Housing Lab’s most recent estimates suggest that Norwegian real house prices were undervalued by 4 percent in 2022Q4 (see Figure 1).  The reason for this is that fundamental prices have increased more than actual prices have fallen. The dominant factor driving fundamental prices the past year is the high inflation rate, pushing down the real interest rate. There is no separate effect of the nominal interest rate (liquidity) in our model, which is a weakness in the current high-inflation environment. However, we have performed an exercise in which we replace the inflation rate by an average between the actual inflation rate and the inflation target (two percent) when calculating the real interest rate for 2022 (see Figure 2). In that case, our estimates suggest that house prices were overvalued by 10 percent in 2022Q4. This suggests that the apparent undervaluation is driven by the high inflation rate. To the extent that inflation expectations are well anchored, there could be good reasons to weigh down the effect of the current inflation rate in the model. In conclusion, there is currently much uncertainty regarding house prices, and developments in actual inflation and inflation expectations will be crucial in the future.

Figure 1

Figure 2

About the index

Housing Lab estimates fundamental house prices for Norway and compare them to the evolution of actual house prices. Fundamental house prices are determined by real per capita income, real after tax interest rates, and the housing stock per capita. Our estimates of fundamental prices are updated and published on a quarterly basis. Due to lags in the construction of the National Accounts data used to estimate fundamental prices, our estimates lag by one quarter. The underlying methodology is  based on published research and is documented in Anundsen (2019).