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The collapse in prices after the explosion of a housing bubble often brings knock-on economic effects. An infamous example of just that is the US’s subprime mortgage crisis, which sparked up in 2007.

Sadly, the danger is nearly impossible to foresee. Thus a popular mantra among academics is that bubbles are difficult to detect until they burst. This is because housing markets are complex, driven by economic conditions and impacted by expectations and speculation in several interrelated areas. How or even whether a country should prevent such crashes is another subject economists and politicians frequently debate.

Both Denmark and Sweden have experienced house market collapses. The 2008 global economic crisis pierced a Danish housing bubble, triggering a banking crisis that wiped out numerous lenders.

In the Nordic region, house prices have nonetheless soared over the past decade. Norway’s housing market was only briefly affected by the 2008/09 global crisis. Soon after, the country’s house prices as well as its household debt began climbing quickly, partly fuelled by persistently low interest rates.

As a result, Norway has weathered much “is it a bubble?” speculation. After all, this oil wealth-reliant economy has grappled with a downturn due to a decline in oil price. Prices sank as global supplies got fat — a glut driven by the US’s booming domestic oil and gas production, continuous production in countries like Saudi Arabia and the arrival of Iranian oil back on the market.

Government heedful

An economically progressive country, Norway has been keenly aware and working to curtail the housing bubble risk for some time. In 2015 The government reduced the loan-to-value ratio, cutting the amount of money homebuyers can borrow from banks from 90 to 85% of the purchase price. In 2015 it closed loopholes that let banks go higher, and made other moves intended to slow lending growth. The idea being that this might trigger a fall in house prices.

This year authorities introduced other “macro-prudential” rules — regulation that aims to mitigate systemic risk. These new measures include prohibiting banks from giving mortgages to customers whose total debt exceeds five times their gross income. The country is also adjusting safety margins to insulate the banking sector via what’s known as a counter-cyclical buffer. This mechanism sets a mandatory level of capital that financial institutions are required to hold.

Clouds clearing

How effective have or will these measures be? It is somewhat too soon to tell. However, this year talk has started circulating that Norway is on the path out of its oil price-driven economic slump. A recent central bank survey found  companies more upbeat about the economy than they’ve been since the oil crisis hit. And on news of this confidence, the krone took a jump up.

The survey polled companies across industries and indicates broad based economic improvement. Norges Bank said public investment, a slowing of the oil industry’s decline and increased private sector demand are to thank. Somewhat ironically, if one considers the bubble concern, the private sector’s role centers on rising consumption and construction activity, which has been made possible by mounting household borrowing.

Nonetheless, the overheated homes market is said to be cooling down. Real estate industry figures show that Norwegian housing prices are loosing momentum, falling by 0.7 percent in May from April.

Real Estate Norway, the national real estate association, expects the year-on-year price growth to keep dropping in 2017. They point to more housing units going up for sale and weary buyers resisting the price heights. Even the capital — where house prices at the end of 2016 were an astronomical 20% higher than 12 months prior — is expected to see the spiral end. Stricter borrowing requirements and lower than expected population growth led the association to downgrade its expectations for growth in Oslo’s housing prices this year to 5% from an initial forecast of a 10 to 12% rise.

Optimism not fully unbridled

Both the OECD and the International Monetary Fund have voiced confidence in the resiliency of Norway’s macroeconomic framework of late. Both also project that economic recovery and job growth will continue.

However, there remain some perils and efforts to be made, the organizations say. Among the work ahead, the IMF recommends that macroeconomic policy attention be paid to returning inflation to target levels. They also suggest that the new macro-prudential policies be reinforced by reforms that further shrink risks from the housing market. Such moves should include reducing tax preferences, including by phasing out mortgage interest deductibility and removing the housing valuation discount for taxation.

Noting that lower oil prices are possibly the new norm, the IMF urged the country to work hard on policies designed to restore competitiveness and transition from oil- and gas-oriented to more balanced sources of economic growth. One example of such measures is to increase tax incentives for research and development and entrepreneurship.

The country’s own Financial Supervisory Authority agrees that Norway should not be feeling completely at ease. In early June, the FSA warned that the entire financial system — banks and insurers included — is still on shaky ground. “Housing prices and household debt are at record highs, and the growth in household debt is significantly higher than income growth. The vulnerability of the financial system has increased,” the FSA said in a statement.

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