as a surprise to some market players. the interest - rate increase was danmarks nationalbank's reaction to considerable outflows of foreign exchange and brought the foreign - exchange flows back into balance. this tool will also be wielded in future when made necessary by the foreign - exchange conditions. the mortgage - credit institutes and the rest of the financial sector are in good and profitable shape. this is among other things the result of strong activity in the housing market where low interest rates and other factors have pushed up prices and stimulated new construction. the prices of single - family houses have risen by 24 per cent in recent years. apartments have seen even larger price increases. greater copenhagen and the major provincial towns have accounted for the strongest price increases, implying an uneven distribution across the country. are the strong price increases signs of a price bubble about to burst? in overall terms that is hardly the case. the outlook of a continued high employment rate gives no reasons to expect housing prices to plummet. besides the favourable development in employment and real incomes, other factors explaining the price increases so far are low interest rates, new loan types, including deferredamortisation and adjustable - rate loans, and a strong preference for certain areas where the supply of housing is limited. a further factor is the freezing of property taxes, which has affected prices in particularly attractive areas where the progressive property tax has or would have an impact. despite the most recent increase, interest rates remain very low in both nominal and real terms. in view of the stronger economic outlook for europe and continued high energy prices the financial market generally expects interest rates to rise further in the near future. this will lead to lower housing prices than would otherwise be the case, perhaps even slightly decreasing housing prices, but for as long as the favourable economic development continues, there are no prospects of considerable large - scale price drops. as in so many other respects, this is by no means an open and shut case. 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 very strong price increases for real property have generated substantial capital gains. if a major proportion of these gains is translated into consumption, there is an increased risk of the economy overheating. the possibility is there. in 2005 the housing wealth of the households rose by approximately kr. 500 billion. in comparison, private consumption totalled approximately kr. 750 billion. the real property of

many households thus appreciated by a good deal more than their earned income after tax. fortunately, the households have generally managed the rising property values prudently. the increased housing wealth can probably only explain " additional consumption " of kr. 7 - 8 billion. instead, the price increases have increased net worth. 2005 saw an increase in net worth – even when housing wealth is excluded. substantial borrowing, e. g. from mortgage - credit institutes, was the order of the day, but to a great extent the loans were used to acquire financial claims, including for pension saving purposes. the households have quickly adopted the new loan types. all in all, the use of the new loan types gives no grounds for concern. an interest - rate increase by 1 percentage point for adjustable - rate loans would on average lead to an increase in the households'interest expenditure on mortgage - credit loans by 1. 2 per cent of gross income. this corresponds to an annual increase of kr. 6, 000 before tax for a household income of kr. 500, 000. there will always be some exposed groups, who will have bitten off more than they can chew. but the extent of this does not by a long way pose a threat to financial stability. however, in the present situation there is every reason to think carefully about ones personal finances, to avoid ending up in the exposed category. history has proven the danish mortgage - credit system to be a good system that has facilitated considerable product development. the annual meeting of the association of danish mortgage banks is a good occasion for listing some of the qualities of the danish system. thanks to the legal framework, including loan limits and the balance principle, it is a very safe system. this plays an important role for the rating agencies. the system has also created a large and liquid bond market. a particularly important aspect is that the system offers individuals access to highly transparent home financing based on the market yield for the issued bonds plus administration fees. there is no doubt that new home - financing products will continue to be developed. the coming year will probably see some innovation in the bond area. denmark will have to adapt its legal framework to gilt - edged or covered bonds. the special collateral requirements could make covered bonds particularly attractive to investors and could thus also benefit borrowers. initially it will be easier for the banks to accommodate the special collateral requirements under eu legislation, while it will be considerably more difficult for the mortgage - credit institutes, unless they reduce the loan limits.