Bubble Index

Housing Lab’s most recent estimates suggest that Norwegian real house prices were overvalued by a bit more than 19 percent in 2024Q1. The reason for this is that fundamental house prices have fallen more rapidly than actual real house prices, which again results in a larger gap between actual and fundamental real house prices. The main contributing factor has been the increase in real interest rates due to a combination of higher nominal rates and lower core inflation – both pushing the real rate in the same direction. Higher real interest rates imply lower fundamental house prices. The underlying econometric model suggests that an increase in the real interest rate of one percentage point is associated with a fall in fundamental prices of nearly 14 percent. Lower fundamental prices imply an increase in the gap between actual and fundamental prices. This is the reason why we observe an overvaluation of about 19 percent in the most recent update. We believe that this trend will continue until inflation stabilizes around the inflation target and/or when Norges Bank starts lowering the policy rate. We therefore expect the drop in real house prices to continue a bit more. Low building activity, high wage growth and lower interest rates will eventually push in the other direction, so that fundamental prices will start increasing again in the second half of 2024, or at the start of 2025.

Figure 1

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).