The Fixed Currency Relationship and Speculative Housing Bubbles in Copenhagen

Mille Marie Stangeland

Student thesis: Master thesis


The aim of this thesis is to investigate if the fixed currency relationship between the Euro and the Danish Krone is contributing in creating speculative housing bubbles in Copenhagen. The housing prices in Copenhagen have risen to a level that can no longer be explained by the fundamental values of housing in Copenhagen. The housing market in Denmark is quite volatile, and the Financial Crisis Commission have stated that the volatility is as grad as for Ireland, Spain and Greece. The monetary policy tools available to the Danish Nationalbank are somewhat limited as a result of the fixed currency relationship. The national interest rates are kept highly correlated to the EU interest rates in order to keep the exchange rate fixed, and the national interest rates can therefore be viewed as imported from the EU. Therefore, they do not follow the cyclical developments in the Danish economy. Hence, this thesis aims to prove that the current interest rates are too low for the Danish economy, and this makes the housing market more volatile and can possibly create speculative housing bubbles. By applying the tests proposed by Phillips et al (2015) the Nationalbank is able to identify explosive behavior in 2004-2006, which can be identified as a housing bubble, and explosive behavior in real estate prices today, which indicates a speculative housing bubble. Housing prices have several drivers, and this thesis identify that the destabilizing real estate taxation, liberal mortgages and low interest rates as the factors that makes the housing market in Copenhagen volatile. There is therefore indications that support that the fixed currency relationship is contributing in creating speculative housing bubbles in Copenhagen.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2017
Number of pages88