OSLO • A widening chasm between housing prices and rental cost could be a sign that a correction is right around the corner.
The biggest chasm can now be found in Norway.
That is the finding of a study of 20 advanced economies by Moody's Investors Service, looking at the dynamic between house prices and what it defines as a market equilibrium.
The thinking goes that when rising home values fail to trigger a move into the rental market, it may be a sign that households may have unrealistic expectations of further price appreciation, a common signal of a market bubble, the credit rating company says.
"Countries where house prices and rents are out of balance, and adjust slowly, are at most risk of detrimental economic effects from high house prices," Moody's analysts Emilla Gyoerk and Collin Ellis wrote in the report.
The housing market of Scandinavia's richest economy has seen prices surge in recent years amid record-low interest rates and massive fiscal stimulus by the government. Its market is now the most overvalued, followed by Belgium, Germany and France, where prices appear to be the "most stretched", according to Moody's.
What is more, Norway also has the highest home-ownership rate among the countries in the study at almost 85 per cent, suggesting a price correction could "have a wide adverse effect on the economy, financial stability and credit conditions", Moody's says.
And now the market is showing signs of cooling, sparking concern of a possible economic downturn. Rapidly falling prices this year have wiped out annual price gains amid a surge in housing supply and as buyers have rushed to sell.
With an overvalued housing market since 2010, Norway is the "most vulnerable" of all the countries analysed, Moody's says.
Norway's financial regulator agreed, saying last month that house prices and household debt constitute the biggest risk to the economy.
The Organisation for Economic Cooperation and Development, in a report this week, also said the government should prepare for a possible house price correction, saying prices "appear overvalued".
The central bank is playing cool for now. Norwegian central bank governor Oystein Olsen, who last week signalled he is preparing to raise interest rates as soon as next year, says he expects a "soft landing".
Nordic economies also have a major advantage: their strong safety nets act like backstops for people in financial distress. Norway also sits on a US$1 trillion (S$1.35 trillion) wealth fund, so there is no shortage of cash should the safety net need a boost.