Housing Lab’s most recent estimates suggest that Norwegian real house prices were overvalued by 1.5 percent in 2023Q1 (see Figure 1). Over the past year, fundamental prices have increased, while actual prices have fallen, which has contributed to narrow the gap between actual and fundamental house prices. The dominant factor driving the increase in fundamental prices over the past year is the high inflation rates, pushing down real after-tax interest rates – an important driver of short-run fluctuations in fundamental prices. Our newest estimates show that fundamental prices were falling moderately in 2023Q1. This is because nominal interest rates continue to increase, while core inflation is increasing less than previously. If the inflation rate goes down and approaches the inflation target, real after-tax interest rates will increase. This will lower fundamental prices further.
There is no separate effect of the nominal interest rates (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 after-tax interest rate for 2022 and 2023 (see Figure 2). In that case, our estimates suggest that house prices were overvalued by nearly 20 percent in 2023Q1. 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, the transmission of monetary policy changes to the housing market, and developments in nominal interest rates, as well as actual inflation and inflation expectations. Based on our estimates, there are good reasons to expect that real house prices will continue to fall, or grow very moderately, for the rest of the year. Further interest rate increases and/or reductions in the inflation rate will put additional downward pressure on house prices, since it will push up the real after-tax interest rate.
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).