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Pro: 'Accident Waiting to Happen' in Norway

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Remember the housing bubble?

If you don't mind a little deja vu, you can watch a rerun right now in Norway.

Property prices in Norway are now 125% of their historic price-to-income ratio, and 50% above their last major pre-bust peak, according to a report by the San Francisco Fed. (Yes, the San Francisco Fed has weighed in on Norway's housing market.) Want more? The finance ministry projects household debt-to-income to reach 200% of GDP this year, which Neil Mellor of Bank of New York Mellon says is "well above that seen in the US before its own bust in 2007."

You would think that the central bank would be itching to raise rates - but you would be wrong. The Norwegian krone is already strong, trading near a ten-year high against the euro, and Norwegian exports are already feeling the effects.

If the krone's "strength has been a cause of consternation thus far, then it is most certainly not about to abate: the Norwegian economy has weathered the storm of crisis better than most, but it has not proven immune - exports fell by an annual 9.7% in December whilst manufacturing output fell 0.1% m/m and retail sales rose by just 0.2%, with both well short of consensus expectations," Mellor wrote in a note to clients.

In short, the Norges Bank finds itself between a rock and a hard place - reluctant to put further constraints on overall economic activity, but therefore hampered in its ability to keep the housing bubble in check.

Norway's Petroleum Directorate expects a decline in oil production in 2013, which isn't exactly making the central bank's decision easier. So for now, Norway's housing sector "price bubble constitutes an accident waiting to happen," Mellor says.

Stay tuned.

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