IMF Urges Action as Negative Rates Infect Danish Property Market

  • Fund says Denmark's 4 years of NIRP hold lessons for others
  • Housing market is area where NIRP fallout is very clear: IMF

After almost four years of negative interest rates, Danish policy makers need to act now to prevent a housing bubble, according to the International Monetary Fund.

“We strongly encourage the authorities to take early action to lean against the wind on house price increases,” David Hofman, IMF mission chief to Denmark, said in an interview. “We see a need for action on a number of points.”

No country has experienced negative rates longer than Denmark and the way the policy plays out will hold lessons for other economies, Hofman said. While banks have fared relatively well in the extreme monetary environment, it’s “exactly in the housing market” that the effect of negative rates is clear, he said.

The IMF says measures Denmark should consider include relaxing regulation in its rental market, while house price developments might benefit from zoning rules, according to Hofman.

“The low interest rates are fueling rapid house price increases,” he said. Though a bubble isn’t necessarily around the corner, “we do think that if these things are left unchecked we may fairly soon reach a situation where house price levels are less comfortable.”

Apartment prices in Denmark rose 11.6 percent in February from a year earlier, while house prices were up 5.3 percent in the period, Statistics Denmark said last week. Apartment prices have soared more than 50 percent since their low point in 2009, Nordea Kredit estimates. Meanwhile, household debt burdens are the highest in the rich world at about three times disposable incomes, the Organization for Economic Cooperation and Development estimates.

The central bank’s deposit rate was raised by 10 basis points in January to minus 0.65 percent, but economists at a number of Denmark’s biggest banks predict policy makers may need to cut rates again after the krone strengthened. The country’s sole monetary policy mandate is to defend the krone’s peg to the euro. The extremely low rates brought on by that policy have fed through to Denmark’s mostly AAA-rated mortgage bond market, with some short-term loans available at negative rates.

Danish home prices have surged even as consumer prices have stagnated and economic growth has remained weak. Handelsbanken characterizes Denmark’s situation as a “low-growth crisis.” And despite being home to the world’s longest negative rate experiment, private investment has slowed and savings have risen.

Hofman says the lack of investment is “more of a global phenomenon” that’s “tied to high uncertainty.”

But in Denmark specifically, “there’s been deleveraging among companies,” which has “impacted their ability and eagerness to spend money on new investments,” he said.

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