Will Housing Market Become Dangerous? - July 31, 2016

Will Housing Market Become Dangerous?

The biggest mortgage bank in Denmark is worried about the housing market as they believe that it may get out of control. Denmark has negative interest rates for years and that is pushing investors towards real estate. This may also bring a price bubble to the market which can burst anytime. But there are good choices in situations like this too.

Nykredit’s fears were reported by Bloomberg, as the bank is worried that “Danes go blind to the risk of rates ever rising again”. As the report mentions, Danish central bank has a negative interest rate for four years, which is the longest for any central bank globally. This led people towards real estate market as they’re trying hard to achieve profit with their investments. Bloomberg mentions, “Danes can get short-term mortgages at negative interest rates, and pay less to borrow for 30 years than the U.S. government.”

This also means that real estate prices are now above their 2006 peak. Why is that important? That was before the global financial crisis. After it, the housing price bubble burst and prices fell 30% in Denmark. Now they’re back again but Nykredit believes people forgot what happened just 10 years ago.

Innovative Securities also mentioned several times that negative interest rates are not healthy for the economy and may lead to severe problems. In our press release in May - which was published in several journals like Yahoo Finance and MarketWatch - we wrote: “All this might lead to a situation alike to the one preceded the crisis in 2008. We can already see the signs of risky loaning, as for the first time since 2007 Barclays is offering a 100% mortgage again.”

Not only were we worried about the negative interest rates. Bill Gross, who earned the nickname “Bond Guru” believes the same.

Generally speaking, real estate might not even be the best investment idea even with better conditions. It can be rather risky as we’ve learned it after the financial crisis, and now Nykredit warns about the dangers too. What’s more, there are other difficulties about real estate. We already collected most of the problems of which investors don’t always think when they buy houses. (You can read our thoughts about this here: Real estate – Is it the best investment?)

All in all, we usually come to the same conclusion: there are better choices for an investor than buying real estate. There are general, long time problems with it like low liquidity and amortization but lately the heightened risk (because of the negative interest rates and the price bubbles) also became a reality. Therefore, it might still be a better idea to turn to properly diversified investment portfolios.