Denmark

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Fears about a recurrence of a new property bubble dog the Scandinavian housing markets – with some reason. In Denmark, the price of an apartment in the port city of Copenhagen has risen twice as fast as house prices in the same area, according to Denmark’s statistics agency.

It means apartment prices in Copenhagen now are higher, relative to income, than they’ve ever been in Denmark – and there’s never been a bigger mismatch between house and apartment prices either, says Danske Bank A/S (Danske), which is both Denmark’s largest bank and the parent company of the country’s second largest mortgage lender. The sales price of an apartment rose by 6.3% year-on-year in May this year; house prices rose by 2.4% year-on-year in the same period.

Denmark isn’t the only Scandinavian economy that’s showing signs of pressure, and Sweden and Norway are both already working to cool their bubbling housing markets, especially in major cities.

Sune Mortensen, vice president at Nykredit Realkredit A/S, Europe’s biggest issuer of mortgage-backed covered bonds, weighs in. ‘You see growth again, you see rising home equity again,’ Mr. Mortensen says, adding, ‘when we saw that the last time, people lost their minds and their good sense.’

Apartments have been a better indicator than houses of the direction of the housing market, and the apartment market is speeding up at a far faster rate than the house market. An 80-square-metre apartment in Copenhagen now costs the same as a 140-square-metre house, according to Christian Heinig, chief economist for RealKredit Danmark, Danske Bank’s mortgage arm.

So what’s causing the disparity? Low interest rates, which restricted price falls after the 2008 collapse to about 20% (for comparison purposes prices fell in Spain by 46% overall and up to 70% in some areas), now risk sending prices rocketing as credit comes into the reach of more people faster.

Mr. Heinig thinks this risks causing a second bubble, especially in the Copenhagen area, and points out that low interest rates and a market led by red-hot major cities and not appreciably cooled by rural slumps is a worldwide phenomenon. The peak in prices represented by Copenhagen isn’t just tall – it’s narrow too.

In Copenhagen’s suburbs prices are almost a third lower. ‘The risk,’ he told Bloomberg, ‘will naturally rise as soon as the Danish economy moves into high gear at the same time rates stay relatively low for a long period.’

Denmark may have the same housing market problems as a lot of other countries – but it has some issues that are all its own too. Demand for Denmark’s covered bonds, which fund virtually all mortgages in Denmark, may be fuelling price increases by holding down the cost of borrowing and increasing demand. Add in the increasing safe-haven investment from Ukraine, where investors fear political unrest and see Denmark as secure, and there’s a recipe for danger. When that combines with a rising tide that makes Danish families to forget the lesson of the 2008 crash – ‘be wary of debt’ – it’s easy to see why so many people are concerned.

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Denmark has finally been able to break out from the debt trap. With the improvement of amortization rates, the world’s most severely indebted households have been saved from the buildup of further debts.

According to the Danish Mortgage Bankers’ Federation, issuing of interest-only loans is now in its highest point. Echoing a similar view, Danske Bank A/S, Denmark’s largest lender, predicts the decline of non-amortizing loans. Jan Oestergaard, senior analyst at Danske from Copenhagen, said in an interview that the share of interest-only loans will most probably see a decrease, but it all depends on the interest rates in the following months.

Loans that are interest-only provide users with a grace period of up to 10 years for the returning of the borrowed sum. The mortgage market of Denmark, which is valued at almost 500 billion dollars, comprises of almost 50 to 55 percent of the interest-only loans. This has had a destabilizing effect on Denmark’s home finance market, which has also got the largest per capita income in the world. Denmark has been urged by the Organization for Economic Cooperation and Development to create a policy that will help in the reduction of the gross household debt, which has been at a record high.

As of now, the government of Denmark is struggling to come up with ways to reduce the number of interest-only loans issued by lending institutions. The new set of rules, guidelines, regulations, and limits is expected to be released and published later in the year.

Waiting for the rules

Henrik Sadd Larsen, the Business Minister of Denmark, has said that officials are trying to come up with a solution that lets the interest-only loan system stay without creating threats for the financial stability of the country.

Banks say that their efforts to push people to opt for amortizable loans have started to show positive results. Households have repaid approximately 2.5 billion kroner in the first part of the year itself. The same time last year, the net borrowing was estimated to be nearly 9 billion kroner.

The new approach

The Danish Mortgage Bankers’ federation Head Karsten Beltoft believes that the new regulations will allow the banks to decide on the limit of interest-only loans, which would be further subject to each household in question. He thinks that it would not work to have a standard limit of 60% across the industry.

FSA is most probably going to come up with guidelines for having a proportion of the total portfolio as interest-only loans. Beltoft also said that almost every second person opts for interest-only loans even today, and this way, the chances are to end up with approximately 50 percent.

The problem

The problem is that interest-only loans have become quite the norm with the Danes. With the interest rates as low as they are today, they do not see any incentive in moving to a amortized loan system. For them, it will directly translate into a major change in the monthly money they have at their disposal today.

IMAGE: “Christiansborg, Copenhagen” by Tim Bartel from Cologne, Germany – Christiansborg. Licensed under Creative Commons Attribution-Share Alike 2.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Christiansborg,_Copenhagen.jpg#mediaviewer/File:Christiansborg,_Copenhagen.jpg