Denmark runs the risk of experiencing another bubble like the one in 2008 in the housing market that ends in a fatal puncture. This boom-and-bust cycle similar to the one after the 2008 financial crisis could be repeated unless the government intervenes to limit lending , according to the governor of the country’s central bank, Lars Rohde.
After nearly a decade of negative interest rates in Denmark – a world record – the country’s housing market appears to have reached a tipping point, Rohde said in an interview on Wednesday reported by Bloomberg . The central banker has called on the government to do what it can to toughen mortgage conditions, but the minister in charge of financial legislation has been reluctant to act.
The Nordic country, which uses monetary policy to keep the krone pegged to the euro, first turned to negative central bank rates in 2012. Economists are now warning that the next step is more likely to be a rate cut. than a rise due to the strong demand for assets denominated in crowns that push up the currency. Meanwhile, cheap mortgages have fueled a housing boom , whose prices are up about 15% from a year ago.
“In May, the price of single-family homes in Denmark was up 15.7% from the previous year, while the much smaller markets for owner-occupied apartments and summer homes have seen price increases of 17, 9% and 26.4%, respectively.
In our opinion, the acceleration in prices has been driven by the change in spending patterns during the covid-19 crisis , but also supported by the lagged effect of the decrease in the costs of the loans in the previous years “, agree the experts of Danske Bank in a note of the past week.
“This evolution will only strengthen in the future”, predicts Rohde. The risk, ultimately, is that “this can lead to a kind of speculative bubble that feeds on itself, and that sort of thing tends to burst at some point. That can have some pretty nasty long-term consequences, like the ones we saw after The financial crisis”.
Following the 2008 crisis, the housing market in Denmark plummeted by more than 20% from peak to bottom. Asked if the country could face a similar trajectory now, Rohde has emphatically answered “yes.”
The concern is that “a series of owners with credit problems are in a situation of technical insolvency,” he explained. “We know from the financial crisis, which we have analyzed, that households reduce their spending quite considerably, which has indirect macroeconomic effects that lead to a slowdown. Experience also suggests that it takes a long time to recover.”
The central bank this week asked the government to restrict access to so-called interest-only loans. But the Economy Minister, Simon Kollerup, has made it clear that he is reluctant to take measures that make it difficult to buy a home. Meanwhile, Rohde has warned that the so-called countercyclical cushion that banks use to hedge against losses should rise to 2%, from zero today.
Banks in Denmark began to pass negative rates on to retail clients in 2019. Initially, only the wealthiest clients were required to share the load, but in the meantime, the threshold has been lowered to surplus deposits as low as 100,000 kronor, or roughly $ 16,000 . Now a larger share of Danish retail deposits is exposed to negative rates than in any other country.
Rohde says this will add a layer of stimulus to the economy that will inflate asset prices . However, it acknowledges that there is not yet enough data available to allow for in-depth analysis.
Less alarm is seen in the forecast from Danske Bank analysts: “We expect housing prices to slow down as the reopening allows people to spend more time and money on things other than housing, but we do not expect a correction in prices to pre-crisis levels . A significant decline in the housing process would require, in our opinion, a substantial increase in interest rates or a new and profound economic downturn. “
Erik Brady is a news media and fitness professional with a strong experience in online journalism as well as he is a well-known fitness instructor. He strength includes knowledge of sports, health, yoga, meditation, and proficiency. From a young age, Erik has interest in Football and he is CryptoNewsMarket Contributor.