Norway’s House Price Bubble—In Two Charts

Ever since the U.S. home price decline, I think people have gotten a little bit too eager to proclaim bubbles everywhere they see. There are some perfectly good reasons why the price of real estate might go on a sustained upward trend. What’s harder to see is why the price/rent ratio of real estate would go on a sustained upward trend of the sort that we’re currently seeing in Norway.

You basically have to be looking at either a speculative mania or else a technological innovation in the field of landlording and rent collection, an industry that’s been notably stagnant since the invention of writing.


Three factors seem to make real estate unusually vulnerable to this kind of mania. One is that the real estate market is much more widely held than normal asset markets. It’s often the only place where a typical middle-class person can make a leveraged investment, so there’s an unusually rich crop of people who don’t know what they’re doing involved in the game. A second is that even though you can put broad nationwide or regional trends into charts like this, it’s still the case that local conditions are relevant, so it becomes very time-consuming to make really big moves in a real estate market. The third issue is that it’s logistically difficult to “go short” on housing. If you’re a Norwegian homeowner, you can sell your place, put your money in bonds, and then start renting. But that’s about it. By contrast, irrationally optimistic flippers can easily find themselves owning many houses.