Extreme Negative Rates Feed Danish Housing Boom in Currency War

(Bloomberg) — Seven years after Denmark’s property bubble burst, house prices in the country’s biggest cities are already higher than at any point in recorded history.

It’s one of the clearest signs that efforts to defend Denmark’s euro peg with an unprecedented injection of cheap money may be distorting some corners of the economy. The central bank’s benchmark deposit rate is minus 0.75 percent after four cuts this year. Yields on government bonds are negative for maturities as long as five years. Mortgage-bond yields trade below zero for maturities up to three years.

“Perhaps it’s okay to have negative rates, but there are a lot of other problems that derive from that,” Sune Worm Mortensen, a director in charge of residential mortgage strategy at Nykredit Realkredit A/S, said in an interview.

In the leafy Copenhagen district of Frederiksberg, an average 140 square-meter (1,500 square-foot) house costs 1.8 million kroner ($275,000) more today than it did in 2009, according to Nybolig, a unit of Nykredit. That’s about 676,000 kroner more than at the height of Denmark’s real estate boom, which topped in 2007 and burst a year later. House prices plunged about 20 percent from their peak through to their 2013 trough, triggering a community bank crisis and sending the economy into a recession.

Denmark’s Financial Supervisory Authority is “continually monitoring the development of house prices,” Director General Ulrik Noedgaard said an e-mailed response to questions.

Krone Crisis

Danes are now about to benefit directly from the record-low rates. Mortgage banks estimate short-term bonds for about 170 billion kroner will be refinanced in auctions starting in the final week of February. According to Nordea Bank AB, about 95 billion kroner of that will be in one-year loans, for which bonds already trade at negative yields.

“It’s going to be one of the most interesting auctions in a very long time due to the krone crisis,” Anders Aalund, chief analyst at Nordea Markets in Copenhagen, said by phone.

Realkredit Danmark’s 1 percent mortgage bond due April 2016 traded at about minus 0.3 percent on Thursday, according to data compiled by Bloomberg. Its yield has been below zero since the end of January.

“Nykredit and Nordea have stopped offering these loans and the overall issuance is low, so liquidity has been very limited,” Aalund said. “That means the auction prices are very difficult to predict.”

Fighting Flows

Distortions in the housing market shed some light on the tight-rope act central bank Governor Lars Rohde needs to pull off. Since the Swiss National Bank abandoned its ties to the euro on Jan. 15, Rohde has fought back speculators betting Denmark will be next to jettison its three-decades-old currency peg. That’s forced him to unleash an historic wave of measures to deter investors from holding krone assets, including suspending government bond sales.

The measures are playing havoc with the accounts of Denmark’s financial institutions, which pay the central bank to hold their deposits. So far, only corporate lender FIH Erhvervsbank A/S has decided to pass on that cost to its clients. Danske Bank A/S, the country’s biggest lender, says it will probably wait at least a year before deciding whether to do the same with retail customers. Chief Executive Officer Thomas F. Borgen said in an interview earlier this month he’s girding for negative rates lasting as long as two years.

While savers are being pummelled, the rewards borrowers stand to reap are being curtailed by some mortgage banks, which aren’t prepared to go ahead with issuance at negative rates.

Preventing Bubbles

Nykredit and Nordea say it makes no sense to offer new loans backed by bonds with negative rates, while Realkredit Danmark, the mortgage unit of Danske Bank, says it will continue issuance.

The FSA has already adopted measures to prevent bubbles in the housing market, with many of the new rules addressing shortcomings perceived to have fanned Denmark’s most recent housing collapse. Part of that framework is a requirement that home buyers provide a minimum deposit of 5 percent of a property’s value, Noedgaard said.

The FSA is in dialogue with the Systemic Risk Council, a unit inside the central bank that Rohde oversees, to ensure house prices don’t rise too fast, he said.

As for investors wondering how to navigate this market, Aalund at Nordea says it all depends on whether they believe the central bank has succeeded in defending the peg or whether it will have to cut rates further.

“A deposit rate of minus 75 basis points? We’ve never had that before,” Aalund said. “If you think it’s going to go away in three months, then it’s not a good idea to buy. But if you think it will prevail, it makes sense to buy them.”

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at [e-mail] To contact the editors responsible for this story: Tasneem Hanfi Brogger at [e-mail] Christian Wienberg