Norway, which chose to remain outside the European Union and the euro currency, enjoys an enviably stable economy and a booming housing market — but it could be going down the perilous route taken by Spain and Ireland, according to economists and recent analysis.
Norway's housing sector , which has seen prices jump by almost 30 percent since 2006 — could end up replicating a pattern of housing booms and busts seen across the globe, from the U.S. to Japan to Spain and Ireland, according to a report by Bank of New York Mellon.
Indeed, Norway's house price rise has been so dramatic that the Federal Reserve Bank of San Francisco wrote a paper on the subject in June that made parallels between the lead up to the U.S. housing crisis and the "irrationally exuberant bubble" of Norway's present boom.
Written by an advisor to Norway's central bank (Norges Bank) Marius Jurgilas and San Francisco Fed's senior economist Kevin Lansing, the paper stated that Norwegian property prices are currently 125 percent of the historic price-to-income ratio and around 170 percent of the historic price-to-rent ratio — a full 50 percent above their last major peak 20 years ago.
Home prices continue to rise sharply with the Association of Norwegian Real Estate Brokers (NEF) reporting an 8.1 percent annual increase in August.
Has Anyone in Norway Noticed?
Though the Norwegian Central Bank has warned about long-term risks to the economy from rising housing prices, it has kept interest rates steady at 1.5 percent and suggested that it will keep them at these levels until Spring 2013. It declined to comment on the housing market.
Neil Mellor from BNY Mellon said that Norway's central bank, has neglected its housing market's indomitable price rise by focusing on a monetary policy of low and stable inflation .
"In focussing solely on indices for goods and services, Norges Bank is failing to address some unnerving trends in a sector whose stability is vital to that of the economy as a whole, " he said. "Low interest rates, stable consumer price inflation and booming asset prices combine to form conditions whereby debt is accumulated at a growing rate to levels that contravene conventional rules of thumb pertaining to stability."
Mellor added that as house prices rise, household debt in Norway is also rising.
"In the case of Norway, the ratio of household debt-to-income has risen dramatically over the past decade and currently stands at around 210 percent — well above that seen in the U.S. before its own bust in 2007 (with debt/income at 130 percent), " said Mellor.
The Central Bank of Norway declined to comment, but Mellor insisted that the unrelenting accretion of debt must not be played down or dismissed as an accounting matter.
"The asset price bubbles formed over the past decade were, in essence, down to policymakers suffering from the same illusion of price stability, albeit an illusion formalized by inflation targeting, " he said.
Norway's Dangerous Success Story
Robert Shiller, professor of economics at Yale University and co-creator of the S&P/Case-Shiller home-price index said that the Norwegian government "should start worrying now."
"This is a reason to expect an unpleasant end to this bubble in Norway. That is what I told them then, " Shiller told CNBC on Tuesday, alluding to a presentation he made in the Scandinavian capitals of Oslo, Copenhagen, and Stockholm in January in which he warned of the impending housing bust.
Rather than learning from its European neighbor Spain — where a real estate bubble saw home prices rise 44 percent from 2004 to 2008 before the bubble burst, leaving not only eerily empty properties and Spanish ghost towns , but domestic banks with billions of bad loans — Norway is letting its economic success go to its head, Shiller said.
"My suspicions are Norwegians are infected with a success story for their own country that makes high home price increases seem plausible to them, " a success only aggrandized when compared to its economically ailing euro zone neighbors, he said.
"They feel smug in their superiority with regard to the European crisis. They didn't even join the EU, let alone the euro. They don't have to bail out any irresponsible southern countries, " Siller said. "They have North Sea oil . They have low unemployment . [In short] they are doing everything right, and lots of people want to come to Norway."
However, Shiller notes that there is a paradox in the Norwegian success story.
"Norway is just about the last country to expect a housing bubble to appear, at least not a rational bubble, since it has so much empty land, " he said. "If home prices get elevated, there should be a prompt supply response, new houses will be built, bringing prices down, unless there is some kind of political or zoning problem. Even such political problems tend not to last forever. "
Indeed, there have been some calls to raise lending rates and tighten policy.
In August, as household credit grew at an annual rate of some 7.2 percent — the highest rate since February — Norway's Finance Minister Signjoern Johnsen called for lending standards to be tightened, and the NEF called for higher interest rates .
Mellor states that "[past crises] have taught us that formulating policy on the basis of a narrow range of prices is a recipe for potential instability, and history tells us that it is never "different this time."
Mellor concludes with a quote from the San Francisco Fed paper on Norway: "History tells us that episodes of sustained rapid credit expansion combined with booming asset prices are almost always followed by periods of financial stress. … Time will tell whether things turn out differently for the Norwegian housing market."
—By CNBC's Holly Ellyatt