COPENHAGEN (Dow Jones)--Danish Central Bank Governor Nils Bernstein Thursday said interest rates are low in both nominal and real terms, but their anticipated rise won't lead to a collapse of the country's housing market.
"This is by no means an open and shut case," said Bernstein, speaking at the annual meeting of the Association of Danish Mortgage Banks. "A combination of considerably higher interest rates and unemployment could cause housing prices to fall more dramatically. At present this is not the most likely scenario, however.
"The outlook of a continued high employment rate gives no reasons to expect housing prices to plummet," he said.
But higher rates will, Bernstein said, "lead to lower housing prices than would otherwise be the case, perhaps even slightly decreasing housing prices, but for as long as the favorable economic development continues, there are no prospects of considerable large-scale price drops.
"In the short term the major challenge is to make the good times last, while preventing the economy from overheating," he said. "In the long term, the challenge is to maintain a healthy balance between the labor force and the rest of the population."
The rising house prices would increase the risk of the economy overheating, if families were to translate their gains into consumption, he said. Last year, housing wealth rose by 500 billion Danish kroner ($83 billion) while consumption totaled about DKK750 billion, he noted.
But so far, Bernstein said, households have been prudent in their spending, with the increased housing wealth leading to additional consumption of about DKK7 billion to DKK8 billion. Instead, many families took out loans and used the money to build up their pension savings, he said.
The government has recently reported large surpluses due partly to the economy's growth. But higher revenue from taxes on pension yields and corporate tax, including companies operating in the North Sea, also have fueled the growth, he said.
Bernstein warned, however, that this income "cannot finance permanently higher expenditure or tax cut. The sound economy must be maintained."
That "could prove to be a challenge, knowing that the number of 25-60 year-olds who are the core of today's labor force, will decline by almost 20,000 per year over the next 10 years."