Denmark’s biggest mortgage bank is warning there’s a risk the housing market may get “out of control,” especially around cities, as long-term negative interest rates make borrowers complacent.
“To be concrete, there is a danger that Danes go blind to the risk of rates ever rising again,” Tore Stramer, chief analyst at Nykredit in Copenhagen, said in an e-mail. “That raises the risk of a major housing price decline, when rates at some point or other start to rise again.”
Denmark’s central bank has had negative interest rates for the better part of four years. Thomas F. Borgen, the chief executive officer of Danske Bank A/S, says his managers are operating under the assumption that rates won’t go positive until “at least” 2018, with Britain’s departure from the European Union adding to the risk of an even longer period below zero.
With no other country on the planet having experienced negative rates longer than Denmark, the distortions the policy is wreaking may provide a preview of what other economies face should they go down a similar path. Danes can get short-term mortgages at negative interest rates, and pay less to borrow for 30 years than the U.S. government.
Apartment prices in Denmark are now about 5 percent above their 2006 peak. Back then, the country’s bubble burst and apartment prices slumped about 30 percent through 2009.
“It’s worth remembering that there’s a real risk that housing prices can see a dramatic fall, even though we’re not seeing a bubble in the classical definition of the term,” Stramer said.
Denmark’s negative rates are a product of the central bank’s policy of defending the krone’s peg to the euro. Its main rate was minus 0.75 percent for most of last year, though the bank raised it by 10 basis points in January in an effort to normalize policy.