By Nikolaj Skydsgaard
COPENHAGEN (Reuters) - A housing bubble is looming in Copenhagen, inflated by Denmark's record-low interest rates, the central bank said on Wednesday.
Prices on flats and smaller houses in Copenhagen are getting close to pre-financial crisis levels, it said.
"Price increases in Copenhagen have been so persistent and strong that the development could be consistent with a bubble," the bank said in its quarterly economic review.
Since 2015 short-term interest rates in Denmark have turned negative, making it much cheaper to finance a new house or apartment. A Danish home owner with a mortgage whose interest rate is adjusted every six months will pay the equivalent of around $60 per month on a 1 million-crown ($147,676) loan.
The cheap rates are driving up demand, and the cost of housing in the capital is rising as a result. Prices on owner-occupied flats in Copenhagen rose 11.3 percent in the first half of 2016 compared with the same period last year.
Prices are increasing at a more stable rate in the rest of Denmark.
But the city is not unique in a regional sense. The rest of Scandinavia is seeing the same kind of surge. Like Denmark, Norway and Sweden enjoy triple-A credit ratings, and investments in credit bonds, currencies and mortgage bonds are rising.
Housing starts in Sweden hit a 25-year high in the first half of 2016 as a response to a housing shortage, making the Swedish government set a target of building 700,000 new homes in the next 10 years.
In Norway, housing prices rose by 8.8 percent in July compared to the year before as demand for homes continue to outstrip supply.
The Danish central bank said in its report that house prices were now making Copenhagen vulnerable to rate hikes.
"The combination of a big rate-sensitivity and a house price development already on the verge of being unsustainable increases the risk of even minor, unexpected rate hikes causing price drops," the central bank said.
A large part of the hike in prices can be explained by the low rates and wage increases, but imminent price drops in the country's most expensive residential areas are probable if the rate jumps, analysts say.
"It's obvious that prices rising 10-15 percent yearly might quickly drop again," Danske Bank's chief economist Las Olsen said in a note.
(Editing by Jeremy Gaunt)