The Unassuming Economist

“House prices in the Nordic-4 [Denmark, Finland, Norway, and Sweden] rose in tandem from the mid-1990s until the recent peaks in 2007 but diverged afterwards. House prices increased by more than 120 percent on average in the Nordic countries between 1995 and 2007 (see Figure 2.1). Since 2007 peaks, house price co-movements seem to have dissipated. The real house price in Norway increased by more than 10 percent relative to the 2007 peak level, while house prices fell by close to 30 percent in Denmark. In Finland and Sweden, house prices have remained broadly constant around 2007 levels,” according to an IMF report on the Nordic Region. 

“The estimates suggest house prices are overvalued in the Nordic-4, but the extent of overvaluation varies (see Figure 2.3). The chart shows both the range and the mean of house price gaps based on the three different measures discussed above [(i) a time-series model; (ii) deviations from a long-run price-to-income ratio; and (iii) deviations from a long-run price-to-rent ratio]. The average estimate of the valuation gap for Norway is just over 40 percent while the estimated valuation gap is less than 10 percent in Denmark. Average estimates for Finland and Sweden suggest that house prices are moderately overvalued, by 12 and 22 percent, respectively.”

“House prices continue to rise in Norway. There was only a brief correction at the time of the global financial crisis. Real house prices increased by nearly 30 percent from its lowest level in 2008. Standard affordability indicators are also worsening. Price-to-income and price-to-rent ratios increased by 14 percent and 23 percent, respectively, from their lowest levels in 2008. Several factors have been identified to explain the upward trend of house prices, including robust income growth and high population growth due to immigration (see Box 2.1). While these factors may partly explain recent house price developments, there are also risks associated with a house price reversal, and household would be vulnerable to house price corrections given the high levels of household debt,” according to a new report by the IMF. 

“Swedish house prices are potentially overvalued by more than 15 percent. House prices have more than doubled since the mid-1990s, increasing by about 140 percent in real terms between 1995 and 2007 and remaining broadly stable since then. Current estimates suggest that house prices are overvalued by 15 to 18 percent, accounting for rental regulations,” the IMF said in its latest annual report on Sweden. 

A new IMF working paper finds that a country’s geography, demographics, and economic conditions (e.g. income level, credit conditions, and stock market performance) are the driving forces behind the changes in construction shares. The results of the paper show that “During the boom, many countries overshoot the norm. After the crisis, the process has reversed and many countries have undershoot the norm. But for some countries, the adjustment has fallen short of the model’s predictions.” So, “when economic conditions normalize over the medium term, Greece, Iceland, and Ireland in advanced Europe, and Latvia, Lithuania, Hungary, and Ukraine in emerging Europe may see a recovery in their construction shares. But construction shares could decline further in Spain, the United Kingdom, Romania, and the Slovak Republic.”

In Germany, “Nationwide property prices have continued to rise, driven mainly by stronger increases in apartment prices in some major cities. However, these prices remain below historical averages and do not appear excessive.”