Data from the U.S. housing boom and bust suggests that Norway’s growing real estate market is likely a bubble and it’s burst will deal a blow to the Norwegian economy, a paper published by the San Francisco Fed said on Monday. Asset bubbles have historically been hard to identify as they build because it is hard to tell whether price rises are being fueled by excessive risk-taking or by plausible economic fundamentals. Using surveys of expectations about house prices in the U.S. five years ago and Norway today, the authors found parallels that suggest trouble may be looming for Norway.
In the United States prior to the housing crash, homebuyers became more optimistic about house prices the more prices rose. Such a view suggests an “irrationally exuberant bubble,” since logic dictates that higher prices should mean lower, not higher, returns, the authors wrote. In Norway, where house prices have risen nearly 30 percent since 2006, a similar trend seems to be in place, they wrote.
Norway’s economy has outperformed much of the rest of Europe in part because of its booming housing market. The Norwegian central bank has warned about long-term risks to the economy from rising housing prices, but last month kept interest rates steady at 1.5 percent and suggested that it will keep them there until spring of 2013. A report from the International Monetary Fund earlier this year suggested Norwegian houses may be “misaligned” by 15 percent to 20 percent.