Photographer: Freya Ingrid Morales/Bloomberg

Denmark's Central Bank Warns of House-Price Speculation Risks

  • Lenders should require bigger down payments, bank urges
  • Nationalbank raises house price growth forecast to 6 percent

Denmark’s central bank said a sudden surge in house prices, especially in the capital Copenhagen, suggests buyers are becoming more speculative.

“Over the last year, house prices have soared,” the bank said in its quarterly review, published on Wednesday. On average, the price of single family houses has risen by 6 percent, while owner-occupied apartments are up 10 percent over the period, the bank said. It urged lenders to require borrowers to make down payments bigger than the minimum 5 percent set as of Nov. 1.

While part of the price development has been driven by record-low interest rates and a general economic recovery, the bank warned of “a risk that price increases have become self-reinforcing, meaning that they are very much determined by expectations of even higher prices in the future.”

“In many cases it would be sensible if banks required a significantly bigger down payment,” the bank said.

The central bank, which uses monetary policy to defend the krone’s peg to the euro, has kept its benchmark rate at minus 0.75 percent since February to fight back speculators eager to break AAA-rated Denmark’s ties to the euro. Denmark ultimately prevailed and the central bank has since been able to unwind some of the extreme measures put in place earlier in the year. Those included a sudden build up in foreign reserves and a suspension of government bond sales.

Denmark has only just emerged from its latest housing-market crash, which threw the economy into a recession in 2008 and 2009. The central bank reiterated a plea to the government to adjust its housing-tax framework, which it says exacerbates price cycles.

The property tax model should be overhauled “so that the tax payable increases when property values rise and decreases when values fall,” the central bank said. “This would help support stability in the housing market and thus in the economy overall. Whether the overall housing taxes are to be higher or lower is a political priority.”

The bank raised its estimate for house-price growth this year to 6 percent, compared with a 5.9 percent forecast made in June. Prices will grow another 3.7 percent in 2016, also higher than estimated earlier, the bank said.

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