Price Boom Far From Over in $450 Billion Danish Mortgage Market

  • Development is reducing risk in Nykredit’s balance sheet
  • CEO says too early to say whether capital need can be cut

Michael Rasmussen.

Photographer: Henrik Frydkjær/Nykredit A/S

After half a decade of negative interest rates, Denmark’s housing market looks like it can only move in one direction: up.

Michael Rasmussen, the chief executive officer of Nykredit Realkredit A/S, the biggest Danish mortgage lender, says the “tailwind” looks like it will last. “We have a strong real estate market and we, of course, benefit from that. I still see a low interest-rate environment for some period and I also see a pretty healthy real estate market, at least for the rest of the season.”

Denmark has had negative central bank rates since the middle of 2012, which is longer than any other country on the planet. The policy has done little to feed consumer prices, with inflation at 1.1 percent in April. Though a four-year high, the reading follows an extended period of disinflation and is considerably lower than the 4 percent price gains Denmark saw in mid-2008.

But with short-term home loans available at negative interest rates in Denmark, the monetary environment has created a frothy property market.

After crashing in 2008, the Danish housing market has made a convincing comeback. Copenhagen saw a 12 percent annual increase in apartment prices in April, which Nykredit analyst Jacob Isaksen characterized as a “surprising acceleration” from 10 percent in October.

House prices are now approaching a 2007 pre-crisis peak, while apartment prices are about 10 percent above the high they reached before the market crashed. (From peak to trough, Denmark’s house prices collapsed more than 30 percent once the last bubble burst at the height of the global financial crisis.)

The climb has caught the attention of the International Monetary Fund. It said on Wednesday increases are a “concern,” especially amid high household debt. The IMF recommended reducing the tax deductibility of mortgage interest payments.

The current price development is helping Nykredit meet regulatory requirements, with higher property values bolstering its balance sheet and leaving the lender with a smaller pool of risk-weighted assets against which it needs to hold capital.

Nykredit tripled its profit after tax last quarter, from a year earlier, and now has a common equity Tier 1 capital ratio -- a key measure of a bank’s ability to withstand losses -- of 19.4 percent. That’s more than Nykredit targets in connection with an initial public offering due to take place before the end of 2018.

“We need to accumulate capital and we are doing that,” Rasmussen said in a phone interview. “But the need for getting access to capital, to get the capital flexibility, still stands.”

Nykredit has said it needs to raise about 15 billion kroner ($2.2 billion) in additional capital to meet stricter global standards that are expected to limit a lender’s scope to estimate its own risk weights. Rasmussen said it’s still “too early to say” whether that figure might end up being smaller. He also said continued housing gains shouldn’t be taken for granted.

“It’s also clear that the development we are seeing should be monitored closely,” he said.

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