Norwegian Housing Bust or Krone Crash?


  • The general voting population is in over their heads.
  • Inflationary bias
  • Expanding money supply
  • Stimulation expected

Increasing Debt on Low-Interest Rates:

Oslo real-estate agents predicted that housing will jump at least another 15% in the coming year. Despite this fact and that inflation is running hot at 3.5% (target is 2%), Norges Bank still sees a higher probability of a cut than a hike. Adding to the argument, the general Norwegian voting population is in over their heads, drowning in debt.

Household Debt (Statistics Norway): Norwegian household debt is 236% percent of income and climbing.

Sources: Statistics Norway ( and Norges Bank (

Norwegians generally follow housing prices while paying little attention to exchange rates. Hence, Norges Bank gets more leeway, staying true to the 2.5% inflation target (Norway’s target is rather high. The US Federal Reserve and ECB aim for 2%). Current real Interest Rates, which consider inflation, are more negative than ever (almost -3%). In Norway, holding money is losing money. Surprisingly, I witnessed sentiment at eye-level that regards saving money as hoarding (greed).

Righting the inflation – key rate imbalance, maintaining the NOK’s integrity, would hit the housing market pretty hard. Moving rates up 2.5% to reach tolerable negative rates (-.5%) would likely devastate the average Norwegian household (husband and wife), earning NOK 86,000 per month (gross) or ca. 64,000 NOK per month (net). For example, “Kari and Ola Nordmann’s” Oslo apartment can easily cost NOK 5 million. Moreover, it’s common practice to finance cars by adding to the mortgage, bringing their total obligation to NOK 5.8 million. These calculations assume no equity since many in Norway also borrows against the house to finance vacations or buy summer homes. Using the DnB Loan Calculator, we can see that even a 2% move can cause indigestion:

  • Current loan payment (80% financed, 25 years, 2.65% nominal – 2.71 effective rate) = 26,510 NOK per month.
  • Adjusted loan payment (80% financed, 25 years, 4.65% nominal – 4.71 effective rate) = 32,784 NOK per month.

Most home loans in Norway are floating 25-year mortgages, adjusting monthly or quarterly, exposing the borrowers to interest rate shock risks. Although a ca. 6,000 NOK payment increase appears manageable for a family earning 64,000 NOK (net), one must consider the whole story. The nightmare happens when one of the earners loses their job, likely in a rapidly rising interest rate environment, while monthly expenses rise (condo association, utilities, and maintenance).

Therefore, on this argument alone, it’s better, as a Central Banker, to trash the Krone and let housing prices continue their run. However inflation stories never end well. Many Norwegians, within a generation, may find the NOK 100 million they received for their 35 square meter apartment will only buy a Big Mac, a bottle of vodka, and a plane ticket to Thailand.

Inflation Persists Despite the “Wealth Effect:”

The Central Bank inadvertently supports the currency, selling sovereign wealth funds’ assets, denominated in USD, to buy NOK, filling budget gaps in local currency. Although this effect strengthens the NOK, both gold and the USD moved up against it last year. Norges Bank recently announced that they will be buying 1 billion NOK per day, up from NOK 900 million last year. The move is expected to improve Krone strength against the Euro this year. Nevertheless, the stronger currency effects have unintended consequences, driving up demand for imports while making it difficult to sell exports. 2017 public spending, aimed at offsetting oil’s downturn, will keep the labor market tight. Furthermore, the government will add unproductive civil sector jobs while offering handouts (buying votes). The resulting price pressures will forbid the markets to right themselves.

Sources: Kitco and Norges Bank

Money Supply Expanding:

The chart below illustrates that money supply expands around 5% per annum, furthering the inflation argument. Using the Rule of 72, the money supply will double in 14 years, structurally halving the purchasing power of the NOK unless the country comes up with something new export, which doesn’t seem likely. (This will be the subject of another story in the future).

Figure 1. Monetary aggregate M3. Twelve-month growth

Note: Inflation is the actual expansion of money supply and rising prices the results thereof

Oil is Not Coming Back:

Despite the misplaced optimism by the Norwegian government and industry officials, oil prices have a lot of forces working against them: OPEC member states inability to keep discipline and the determination of the American roughneck. The tangible capital equipment, leftover from the first fracking boom, still remains out there, ready to get back to work. As soon as oil approached $50, rig counts started to rapidly recover like a “V” (see the inflection point in mid-2016). If prices continue to hold above even $40, which is not enough for Norway, the Americans, backed by President Trump, will surely find a way to put the rest of those rigs back to work at Norway’s and OPEC’s expense. (Frackers have cut break-even costs substantially through technology innovation.)

What’s Next?

With negative real economic growth around -3% (GDP growth – Inflation rate), we can expect to see more socialist solutions to free market problems (to be discussed in future articles) that lead to further NOK declines, relative to Gold and the USD. The Norwegian government will do anything to save housing, which includes crashing the Krone.

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