Norges Bank

Housing investment and house prices

Dag Henning Jacobsen, senior economist, Financial Markets Department, Kristin Solberg-Johansen, economist, Economics Department, and Kjersti Haugland, economist, Monetary Policy Department.

In this article, we analyse developments in housing investment and the interaction between demand and supply in the housing market. The analysis indicates that the pronounced increase in housing investment since 2004 is related to low interest rates and high house prices. In the past 3½ years, house prices have increased by close to 50 per cent. The sharp rise in housing demand has pushed up house prices, since supply is determined by the existing housing stock in the short term. Capacity constraints in the building sector are preventing a rapid adjustment of the total housing supply to increased demand. When the housing stock over time adapts to demand, this will in isolation push down house prices. House prices may therefore have become higher in the short term than they will be in the somewhat longer term. However, a model-based analysis illustrates that there may be a soft landing for house price inflation despite monetary policy tightening and an increased supply of dwellings.

Published 3 May 2007 08:30
Published 3 May 2007 08:30