Zero Rates, Zero Paybacks Haunt Danish Central Bank Governor

Six years after Denmark’s most recent housing crash, the governor of the central bank says the mortgage market is far from balanced.

“The combination of zero rates and zero amortization almost removes the boundary for where property prices can go,” Governor Lars Rohde said yesterday in an interview in Copenhagen. “If you on top of that add a tax system that is destabilizing to prices rather than stabilizing, then we have a cocktail that should be watched very carefully.”

As governor of a central bank that defends the krone’s peg to the euro, Rohde has virtually no scope within monetary policy to address imbalances in the housing market. Denmark’s benchmark deposit rate is 0.05 percent. The bank last raised the rate in April after keeping it below zero for almost two years.

“When the objective is to have a peg, we can’t use monetary policy to deal with bubbles,” Rohde said. “In that situation we’ll need to use other political instruments. We import the rates of the euro area, which may not match the economic cycle in Denmark.”

Taxing Property

Rohde has repeatedly urged lawmakers to consider a review of Denmark’s property taxes to help stabilize the market. The existing model, which has also come under attack from academics, including the government-backed Economic Council, means homeowners pay less relative to the value of their properties when prices rise and more when prices decline. Critics argue the model is pro-cyclical, though lawmakers have resisted change out of concern such a step would be unpopular with voters.

The risk of higher property taxes tops a list of concerns for Danish homeowners, according to a survey published today by Nykredit Realkredit A/S, Denmark’s biggest mortgage lender. Higher interest rates ranked sixth on the list while falling house prices came in third, the survey showed.

House prices rose 3.6 percent in March from a year earlier, Statistics Denmark said on June 4. Apartment prices jumped 8.9 percent over the same period, and are now at 91.3 percent of their 2006 level, which marked the height of Denmark’s property boom. From 2007 through last year, Danish property prices sank some 20 percent.

Currency Regime

“One may have the view that under different circumstances we should have somewhat higher interest rates than we do currently,” Rohde said. “But that’s how the rules are when you have a fixed currency regime.”

The comments come as Denmark explores how to address its record private debt load. The Organization for Economic Cooperation and Development estimates that Danes carry the highest debt burdens in the rich world, at more than 300 percent of disposable incomes. Though the borrowing is offset by high savings rates, the OECD warns the value of those assets may fluctuate while debt burdens are constant.

Lawmakers are set to discuss how to rein in issuance of interest-only loans, which have soared to account for more than half of Denmark’s $550 billion mortgage bond market since they were first sold in 2003.

Denmark needs to exercise caution when deciding on new rules as house price developments vary greatly across the country, Rohde said. While the capital Copenhagen enjoys a price rebound, some parts of Denmark’s property market are still deep in the grip of a housing crisis.

“We still think that one needs to be very careful about the timing of new measures,” Rohde said.

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