IMF warns Denmark over potential housing bubble

The International Monetary Fund was warning Denmark of the need to avoid a housing bubble this week, as the Scandinavian country approached the four-year anniversary of implementing negative interest rates.

“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,” IMF mission chief to Denmark, David Hofman, was quoted as saying in an interview with Bloomberg.

He pointed out that no other country has gone through such a long period of negative rates, with Denmark acting as a guinea pig of sorts for the policy.

Hofman said banks have done quite well under the policy, but the effect of negative rates was clear in the housing market.

“The low interest rates are fueling rapid house price increases. We do think that if these things are left unchecked we may fairly soon reach a situation where house price levels are less comfortable.”

Danmarks Nationalbank raised its deposit rate by 10 basis points in January to sit at -0.65%, though a number of local economists believe it may need to be reduced again in response to a strengthening of the krone.

House prices have rocketed in recent years, in the face of stagnant consumer prices and economic growth.Prices for flats were up 11.6% in February against a year earlier, with house prices growing 5.3%.

Nordea Kredit analysts say flats have risen more than 50% in value since bottoming out in 2009.