A booming Danish housing market is raising concern about bank credit risks linked to mortgage loans, and lending rules might need to be tightened, the central bank said on Thursday.
Danish homeowners are among the most indebted in the world relative to their income, which combined with rapidly rising house prices over the past year could make banks vulnerable if house prices fall.
Further price increases could be fuelled by near-record low interest rates and high disposable incomes among households supported by economic aid packages during the pandemic, the central bank said in a bank stress test review.
“The booming housing market gives cause for concern,” deputy central bank chief Karsten Biltoft said in a statement.
“There’s consequently reason to look at a tightening of lending rules to limit vulnerability to a subsequent drop in house prices.”
Activity on the Danish housing market has reached levels above the years preceding the 2008 financial crisis, the central bank said.
A down payment of 5% for home purchases is required in Denmark, below other Nordic countries, the central bank said.
Denmark’s government said last week it expects prices on one-family houses to rise by more than 11% this year, building on a rise of nearly 5% in 2020.
The finance ministry said the government was following developments in the housing market closely and that it was awaiting recommendations from the Systemic Risk Council, an independent economic adviser to the government.
The central bank said on Thursday that the country’s systemic risk council will recommend further measures to limit continued risk build-up in the housing market.