Danes shouldn’t expect any help from the central bank to save the economy from an overheated property market.
Lars Rohde, the governor of Denmark’s central bank, says there can be no creative use of monetary policy to reflect risks to the property market, because his only concern is defending the krone’s peg to the euro.
“Therefore, we have to say to the public that there is a risk,” Rohde said in an interview in Copenhagen on Wednesday. “Is it visible in the money market, the bond market? No, it isn’t. People, when reading the interest-term structures, are expecting monetary policy rates to be negative for the next five years. So is it likely? No, maybe not, but is it a risk? Yes, definitely.”
The message from the central bank to the financial industry is therefore that lenders “should prepare themselves that customers may be hurt by higher interest rates,” Rohde said. “And the customers themselves should maybe be a bit more on the safe side than they’re used to.”
Eight years after its last property bubble burst, Denmark is wondering whether almost half a decade of negative interest rates has set the economy up for a repeat of that crisis. No other country has had negative interest rates as long as Denmark, with most economists predicting years more of sub-zero policy ahead.
The unprecedented nature of negative rates means that “nobody knows” how this will end, Rohde said. But these days, shifts tend to rip through markets “much quicker than we expected,” he said.
In Denmark, property price developments in the capital are causing the most concern. An apartment in Copenhagen now costs about 11 percent more, on average, than in September 2006, Danske Bank estimates. That was the month prices reached their peak before sinking into the housing slump that sent the economy into its worst recession in a generation. Nationwide, house prices remain about 11 percent below their pre-crisis peak.
Continued housing price gains in the Danish capital of around 10 percent “are unsustainable in the longer run,” Jacob Isaksen, an analyst at Nykredit, said in a note. “Incomes, which means home buyers’ purchasing power, wouldn’t be able to keep up with that pace.” Stricter regulatory requirements and construction will ultimately drive down prices in the Copenhagen area, he said.
Rohde is far from alone in sounding the alarm on risks threatening the housing market. Analysts at Nykredit, Denmark’s biggest mortgage lender, have warned that Danes need to start putting the possibility of house price declines “on their radars” or risk going into “shell shock” when it happens. They’ve also characterized price developments in Denmark’s cities as “out of control.”
Meanwhile, Rohde says he expects “a gradual increase in the inflation rate in Europe.” He described the “extremely low inflation rates” that have persisted despite record central bank stimulus as a “temporary phenomenon.” A report published on Wednesday by his bank showed the Danish economy now faces bottlenecks due to a lack of supply in the labor market.
Over time, “we will see a gradual increase in inflation,” Rohde said. “It is the mandate of the European Central Bank and I’m quite confident that” they will “deliver,” he said.