Is it a crisis when people rent in the middle of Oslo, instead of buying a villa half an hour outside the city?
Net on case
Almost every day there are tear-jerking articles in Norwegian newspapers about how difficult it is to enter the housing market.
The peak of the accident is that a nurse can now only afford to buy 2.5 percent of the homes in Oslo.
And one politician after another comes up with well-meaning, but stupid, proposals that will only make the housing dream even less achievable.
In reality, the crisis in the housing market is imaginary and many of the problems are self-inflicted.
First, there is not one housing market, but many. And prices in most parts of the country are low.
A quick search on Finn shows that you can buy a 130 square meter detached house in Vadsø for NOK 2.0 million, a 170 square meter detached house on Evje north of Kristiansand for NOK 3.5 million and a detached house of over 100 square meters in Åsane in Bergen for 4.4 million kroner.
In addition, more and more people are buying their own apartment, and housing costs have been driven down by a record low interest rate.
If there is a crisis in the housing market, then it is only in Oslo. And the reason why prices are rising is that there are few homes and high purchasing power among those who want to live in the middle of the city.
To the extent that we are going to talk about distress, it is a noble distress or poor financial choices – possibly a desire to live cramped and central, rather than spacious a little outside the city center.
- A 28 square meter apartment at Sagene in central Oslo now costs NOK 3.3 million.
- For about the same price you can buy a detached house of 126 square meters 40 kilometers away in Enebakk.
Here it is a free choice that politicians should not indulge in. There are many who would rather live cramped on Sagene than spacious in Enebakk, and who take the consequence of that preference. And there is no crisis.
The alleged housing crisis consists of young people in the establishment phase not being able to afford to buy a home right after they have started working in the country’s most attractive housing area. But when in history has it really been possible?
The next sign of crisis is that people have to rent because they do not get a loan to buy their own home.
It is a real problem for many, and the unfortunate thing is that the problem is constructed and self-inflicted.
And quick search at Utleiemegleren show that a two-room apartment at Sagene costs you around 13,000 kroner a month – or 156,000 kroner a year. And it is an expense that must be paid from your net salary after tax, and which means that the road to your own home becomes longer and longer due to the increase in value you do not receive.
What is the alternative? On Finansportalen, you can find out with a few keystrokes that NOK 13,000 a month is enough to interest on a loan of NOK 3.0 million with a five-year fixed interest rate! And since you get an interest deduction on the debt interest, you get another 15,000 kroner on the tax.
The alleged housing crisis consists of people renting expensively rather than borrowing money to own their own home just outside the city center.
But not everyone can get a loan, is the objection.
And then we are to the self-inflicted, or rather – the politically imposed – namely the hopeless lending regulations that forbid the bank to lend you more than five times gross income, up to 85 percent of the value of the home.
There is broad political agreement on this regulation, even though it is completely unreasonable and daily creates new losers in the housing market and has contributed to increased economic inequality in recent years.
Let’s look at an example:
When interest rates fall, it becomes more profitable to own shares and real estate. This is one of the reasons why the Oslo Stock Exchange has risen and created new million fortunes, while everyone with their own home has seen the fortunes increase.
The losers are those who have neither shares nor real estate – either because they do not have equity, or have chosen to save in the bank.
Low interest rates also make it cheaper to own a home.
According to Finansportalen is the best effective interest rates now at around 1.4 percent – or just over 1.0 per cent after tax. Last year has the price increase was 2.9 percent. In practice, you get paid to borrow money (negative real interest rate after tax).
The problem is not that homebuyers cannot afford to pay loans and interest, but that they are not allowed to borrow the money because politicians force the banks to be unreasonably cautious.
Dagsavisen today has an interview with a person with a permanent job and equity, who has rented a home for five years, and who due to the income can only borrow two million kroner – which indicates that she has around 400,000 kroner in annual salary (on due to the fact that banks are not allowed to lend her more than five times the income).
Banks are also required to carry out a stress test to check whether the borrower can withstand a rise in interest rates of five percentage points – or a rise in interest rates of almost 400 per cent from the current level. And no one believes that, even though everything is possible in principle.
But it is also possible with negative interest rates.
For fear of an interest rate earthquake no one believes in, Dagsavisen’s interviewee is not allowed to borrow more than that with 400,000 in annual salary she would only have monthly interest expenses of 1,700 kroner after tax – or 2,800 kroner, if she is careful and binds interest for the next five years.
The real problem in the housing market is actually quite simple: Government regulation prevents banks from taking normal risks and giving loans to people with permanent jobs who want to establish themselves in the housing market. Tax deductions on interest make it more profitable to own than to rent a home. This is a trap that hits those who do not have parents with good advice to line up.
When politicians do not understand the problem, they come up with solutions that either will not work or that in the worst case make the problem worse.
Housing prices in Oslo are rising because the region has the country’s largest value creation and many high-income workers, who have both the will and the purchasing power to borrow money at a record low. Combined with political awkwardness in increasing housing construction, this means too few homes where people want to live and the price spiral is underway. If there are 100 home buyers, then the price development will be completely different if there are 80 or 120 homes for sale.
(Then it is part of the picture that housing costs have not increased significantly because the fall in interest rates has more than compensated for the price increase. And that more and more people are buying their own home, even though the impression from the media is that more and more people are left out). Since 2015, 85,000 more households own their own homes, while 59,000 more households have rented. The proportion of tenants has stood roughly still.
The big question is whether politicians should do something, and what they should do if necessary. Most parties agree that people should own their own home. This means that a proposal for a third housing sector or that the municipality will buy up more apartments does not solve anything because it neither increases the supply of housing nor affects the imbalance between supply and demand.
The losers will be those who are not allowed to borrow money from the bank or receive gentle gifts from the municipality.
Other measures that have been proposed are start-up loans from the Housing Bank or various forms of rent-to-own, ie that you gradually buy into your own apartment. Both will increase the purchasing power of those who do not enter the housing market today. But if the supply of new homes does not increase, it will only lead to even stronger price growth.
(It is also a bit illogical for the state to take a risk through the Housing Bank for loans the banks are refused to provide – at the same time as the borrower gets the same amount of debt if the money is borrowed from DNB, Nordea or the Housing Bank).
So what is the conclusion of all this?
Neither the right nor the left want to trigger a fall in house prices that ruins the barely 1.9 million households (or voters) who own their own homes, and who have most of their wealth in the home.
As long as Oslo has greater value creation than anywhere else in Norway, a highly educated workforce will flock to the region. And there is no immediate solution to the imbalance as long as politicians do not get new housing regulated, while new construction costs also push up the prices of new housing.
The most positive thing is that the market seems to be working, and that the pandemic’s use of home offices has made people move from Oslo to the neighboring municipalities.
It is better for people to borrow money to buy a detached house in Enebakk, rather than renting a cramped apartment on Sagene.
PS! What do you think politicians should do with the housing market? Keep your fingers crossed or make it easier to own your own home? Write a debate post!
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