We see some future challenges in the residential real estate market, but we nonetheless believe that a foundation is in place for housing prices to continue to climb.
We have seen a record-strong housing market in the past 20 years, and with the exception of the 2008 financial crisis, the arrows have largely pointed in only one direction: up. This development has been driven by strong economic growth, increased access to money, interest rate reduction, population growth, and urbanisation. Based on SSB’s population projections as of Q2 2020, the population of Oslo is set to increase by about 5100 people each year up to 2030. This is a significantly lower growth compared to the past five years, where records show an average growth of 9200 people.
In the same period, the commissioning figures for new residences in Oslo have been at an average of about 3700 residences over the past five years. This equals one residence commissioned for every 2.5 new inhabitants. According to SSB, the average household nation-wide consists of about 2.2 people. This figure is significantly lower in Oslo, however. This indicates that there has been a shortage of new residences in Oslo in recent years. Housing needs will vary based on the anticipated future age composition of the population, and a consistently growing share of single-occupant households will contribute to a rise in housing needs in the future.
It must also be noted that major sections of Oslo’s housing reserve consist of land plots located at Gjertsrud-Stensrud in south-eastern Oslo, an area that is not expected to be developed in the near future due to challenges in infrastructure and public transport solutions. This, in combination with a deficit of new residences in recent years, will, in our opinion, reinforce the mismatch between supply/and demand in the coming years. It is said that the interest rate is the nuclear option in the housing market, and the current low-interest-rate grants the population more purchasing power. This has a direct impact on housing prices. At the same time, improvements to the current situation in the form of a COVID-19 vaccine, or a possible overheated housing market, may result in the Bank of Norway raising interest rates sooner than expected. An interest rate hike may, in turn, have a psychological impact, causing a chill in the market.
The big factor of uncertainty is the COVID-19 virus. As of this writing, we are in the midst of a pandemic, and the future economic and social consequences remain unclear. The GDP of mainland Norway dropped by 6.3 per cent in the second quarter, marking a two-quarters of decline in the mainland economy for the first time since 2009. Norway is thus officially in a recession. The drop in employment and an increased number of bankruptcies contribute to increased uncertainty among the population. Furthermore, the pandemic may lead to changes in how we lead our lives, which will directly affect many industries.
Meanwhile, we expect that future population growth and low commissioning figures, combined with historically low-interest rates, will result in increased pressure on residential prices in the capital over the next few years. The already-low commissioning figures for new housing projects have been further reduced in the wake of COVID-19 due to delays at the Agency for Planning and Building Services, as well as temporary sales freezes in several projects. We believe that the demand for residences in Oslo will exceed the supply side for many years to come, and we believe we may see a growth in housing prices of 10-15 per cent over the next three years.
It is important to bear in mind that we rarely saw transactions with sales prices exceeding NOK 100,000 per square metre of usable floor area (UFA), regardless of whether these were older buildings or new constructions. In the present market, small apartments with central locations are regularly sold for more than this, and we see examples in which new residential projects are priced up to NOK 300,000 per square metre of usable floor area (UFA) for individual objects. In short, this is the “new normal” for the Oslo housing market.
Georg Steen, Veridian
Veridian Analyse are specialists in consulting for commercial and development real estate. Our employees have backgrounds in finance and technical construction, allowing us to assist with complete property analyses, whether this involves assessing the property in its current state as-is, assessing the property’s development potential, or assessing the property based on special premises.
