Housing Lab’s most recent estimates suggest that Norwegian real house prices were undervalued by 2 percent in 2023Q2 (see Figure 1). Over the past year, fundamental real house prices have increased, while actual real house prices have fallen. This 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. Even though nominal interest rates have increased considerably, this has been outweighed by the high inflation rate, which has resulted in a lower real interest rate. When the inflation rate eventually approaches the inflation target of two percent, real after-tax interest rates will increase. This will lower fundamental prices.
There is no separate effect of the nominal interest rate (liquidity) in our model, which is a weakness in the current high-inflation environment. The actual interest rate is a poor proxy for expected inflation when the inflation rate is high – in particular since long-term inflation expectations seem well anchored. For this reason, we have performed an exercise in which we replace the actual 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 16 percent in 2023Q2. To the extent that inflation expectations are well anchored, which they seem to be, 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).