Norway is stuck between a rock and a hard place. Last week, the Norges Bank defied market expectations by leaving rates unchanged citing an overheating housing market. Here’s the statement:
"The key policy rate was reduced in December to counter the risk of a pronounced downturn in the Norwegian economy on account of lower oil prices. So far, the effects on the real economy have been relatively small, and house prices are still rising at a fast pace. The key policy rate has therefore been left unchanged", says Governor Øystein Olsen.
...and a bit more from the bank…
Banks have lowered their residential mortgage rates by a little more than ¼ percentage point. House prices are still rising at a fast pace and are somewhat higher than projected in December. The rate of household debt accumulation has been slightly lower than that projected, but debt continues to rise faster than household income. Related: Low Prices Help Arctic Avoid A ‘Gold Rush’ Scenario
As a reminder, here’s what the rise in property prices looks like:
Clearly, aggressively lowering rates in such an environment could be a decidedly risky proposition because, as the country’s Financial Supervisory Authority warned in January, “lower interest rates and strong competition in the mortgage lending market could contribute to continued rapid growth in debt and house prices [causing a] self-augmenting spiral.” As bad as self-augmenting spirals are, some commentators think the central bank may be endangering the economy by being too slow to pull the trigger on rate cuts. Here’s more from Bloomberg:
The difference between market expectations and what the bank did “is more a matter of timing and perhaps different weighting of different types of risks,” Olsen said.
The government is also working on plans to cool a run-away housing market. Norwegians owe their creditors about twice as much as they make in disposable incomes, more than at any time in the country’s history. House prices jumped about 9 percent in February from a year earlier to a record high…
Olsen’s decision to hold rates was “ill-advised,” said Kari Due-Andresen, senior economist at Svenska Handelsbanken AB. “The housing market is not what’s going to tip the economy.”
She sees Norges Bank being forced to act on its signal for another cut as early as May, followed by more easing in December. “It takes time for the shock to hit the whole economy, I think we will continue to fare worse and worse as we go forward -- then the housing market will cool.” Related: Three Triggers That Will Send Oil Crashing Again
Meanwhile, the Supervisory Authority begs to differ and last week proposed a new set of requirements on residential mortgage lending citing the increasingly precarious situation:
There is a risk that the prospect of long-lasting low interest rates and easy access to credit will cause the strong growth in debt and house prices to persist. That would further increase households' debt burden and help to maintain demand for goods and services for a time, but such a development is not sustainable. The risk of a subsequent sharp setback and financial instability would thus increase.
Finanstilsynet concludes that it would be most appropriate to establish requirements for lending practices in the form of regulations. This course of action is necessary in order to remove or strongly curb banks' scope to deviate from the standards for residential mortgage lending practices.
All in all, the country is truly backed into a corner: ease too much and the housing bubble becomes even more unsustainable, don’t ease enough and the oil-dependent economy gets it.
Amidst the uncertainty, Norway’s nearly $900 billion sovereign wealth fund (the largest in the world) is keen on being a source of stability in an increasingly unstable world — which is why it’s planning on spending the country’s oil revenue on “a lot” of Asian skyscrapers and shopping malls. Here’s more from Bloomberg:
The Government Pension Fund Global, its official name, targets markets based on growth potential and supply constraints as it seeks to invest in 10 to 15 cities globally. It has already snapped up properties in New York, Paris, London and Berlin among other cities. The fund held about $18 billion, or 2.2 percent of its assets, in real estate last year, and is seeking to build that share to 5 percent.
The focus is on specific markets rather than sectors, Kallevig said.
“When we say Singapore and Tokyo, we mean the better parts” of those cities, he said. “My guess is office properties will be the main component, because that’s what’s for sale in those parts of town. There aren’t many shopping malls in the center of Tokyo or the center of Singapore.” Related: Wall Street Losing Millions From Bad Energy Loans
Fortunately, the fund has a sterling track record when it comes to managing risk. For instance, there was the extraordinarily prudent bet on Greek debt in 2010 on the basis that the fund’s investment horizon was “infinity” (via Bloomberg):
Norway says its long-term perspective will protect it from losses. “One could say we are investing for infinity,” Johnsen said in an Aug. 27 interview. “It is important when you look at the time scope of the fund and the investments that there should be a portion of active management.”
Fast forward to 2012 (Via FT):
Norway’s oil sovereign wealth fund has sold all its holdings of Irish and Portuguese government debt and reduced its ownership of Spanish and Italian bonds as part of a continuing protest over its forced participation in Greece’s debt restructuring.
So Norway, we wish you the best of luck as it certainly appears you’ll be needing it given that the Norges Bank is facing a lose-lose scenario where leaning one way inflates an epic housing bubble and leaning the other risks exacerbating the negative effects of falling crude prices and speaking of crude, your oil wealth is being invested in Asian properties by the same people who once thought it was a good idea to load up on Greek bonds.
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