
- Name:
- Kjetil Olsen
- Title:
- Chief Economist
Housing investment has plunged 36% over the past two years, dampening economic growth in Norway. Housing construction has dropped due to a sharp rise in construction costs and low sales of new homes.
However, activity has been quite good in the market for existing homes. Due to a large price gap between new and existing homes, households have begun to favour existing homes over new ones. Last year, prices of existing homes rose by more than 6%, and the transaction volume has been high. With prices of existing homes expected to rise even more throughout 2025, the price gap between existing and new homes will likely narrow further. The "discount" on existing homes will thus be smaller and more potential buyers may again prefer new homes. Historically, the rise in housing starts follows developments in housing prices fairly closely; see Chart A. New housing construction thus looks set to pick up in 2025.
NAV unemployment statistics show that unemployment in the construction sector has increased by some 3,000 people over the past couple of years. New construction has not seen a similar drop since the financial crisis. At that time, unemployment rose by nearly 8,000 people. Back then, the share of foreign labour in the sector was probably considerably smaller. This time, unemployment has been lower, partly because many have returned to their home countries or found work outside of Norway.
Growth in prices of existing homes and building start permits
Norway = 100
Foreign labour has contributed to flexibility in the Norwegian economy in general and perhaps particularly in the construction sector during upturns and downturns. The question now is whether that flexibility still exists. Calculated in a common currency, a foreign worker earned around 20% more in Norway ten years ago compared to Germany and Denmark, for example. A carpenter from Poland who wanted to earn more than in his home country would then be very likely to favour Norway.
However, due to the sharp NOK weakening, Norway is not as attractive to foreign workers as before. The Polish carpenter would now be better paid in his own currency by going to Denmark; see Chart B. In Germany – neighbour to Poland and much closer than Norway – a carpenter is now paid about the same as in Norway. This could make it more difficult to attract carpenters.
Capacity challenges may gradually limit the number of new homes that can actually be built.
According to Norges Bank's regional network, the construction sector has spare capacity, but it has already started to pick up slightly. If housing starts and construction activity ramp up in response to surging prices for existing homes, as seen in the past, capacity issues could quickly become a challenge. Housing construction is expected to grow not only in Norway, but also in other European countries. Everyone will then compete for the same labour. Capacity challenges may gradually limit the number of new homes that it will actually be possible to build in the coming years. If so, this would place further pressure on housing prices in the years to come.
This article first appeared in the Nordea Economic Outlook: Consumer comeback, published on 22 January 2025. Read more from the latest Nordea Economic Outlook.