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Denmark must act to prevent housing bubble

Staff writer |
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 (IMF).

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

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.

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