I’ve taken the Standard & Poors home price index and compared it with the statistics of the national Danish Census Bureau. And arbitrarily set the prices of first quarter 1992 = 100. Not seasonally corrected: I prefer my statistics the same way I like my beef: Raw.
The chart is below:
For some time – far too long - I have kowtowed to the “experts” that the housing market in a mini-state like Denmark and the USA cannot be compared: Bla bla bla…. And they have a totally different financial sector: Yada yada yada…..
The two markets and financial sectors are immediately comparable!
See for yourself.
- Prices have dropped from the top 1/5 in Denmark and 1/3 in the USA.
- Tops were Q2 2007 in Denmark and Q2 2006 in the USA – giving a time lag of rather precisely one year.
- The bottom of the first drop was in both countries Q1 2009.
- Then followed by a bank induced moratorium of 3 years.
- Now prices drop again.
It is not to gloat: “I told you!” – but I told you so.
The banks are the same in both countries and the tricks they play are just the same.
The main difference seem to be the real estate financing where Denmark HAD a stable financing of homes with fixed interest convertible annuities bonds. These loans were originally granted without respect to the debtors ability and willingness to pay: I you defaulted – you were foreclosed and the property sold off at 80% (the limit a building society or mortgage bank was allowed to finance) of your original purchase price.
Said loan has some qualities that ultimately suits both investor and home owner:
- Any debtor feeling himself unfairly treated is at liberty to refinance at current interest level.
- The investor got a bond with liquidity comparable to sovereign bonds – and no risk, as debtors paid an administration fee to take care of foreclosure cost.
- The investor furthermore got a very much shorter maturity than the label 30 years as most loans were converted long before that.
- The investor could always turn the loans into cash at a nominal cost, because a million greedy house owners were jumping at the chance of buying back their loans whenever there was the least profit in sight.
Of course these advantages were priced into the interest rate – and then rolled further down in house prices. The result was higher home values - of perhaps 20-25% - in Denmark compared to the USA. (Net of a village idiot fee of 5-10% due to Danske Bank and Nykredit – optimistic ?)
To preempt offended screams: Yes they are crooked too. What did you expect: Mother Theresa ran an emergency hostel, not a mortgage bank!
What these graphs do indicate is that the limit of 80% financing of property value is probably to high!
The US took a knock down of rather exactly 33% whereas Denmark took only 20%: This would seem to indicate that the limit should be placed at the 65-70% level. It seems like the seniority of the loan give the robustness of the bond.
Put in other words – a 20% drop in prices would not have affected the Danish mortgage banks to any appreciable extend – or rather it is the limit to what the tricks of the trade can affect. And doldrums of three years seem to be the time putrification can be postponed. About the same pause after the crash in 1929.
The leveling off is interesting as well: In both countries it seems like the efforts to keep property values up is slipping: Dead people have to move on (out) eventually. In both countries the financing of real estate has more or less killed itself and these mortgage banks will most likely never regain consciousness.
The relevant question is where the next step on the staircase is?
It is hard to say, because home ownership (and rental apartments for that matter) does need financing and as the mortgage banks will never ever again be able to function, other methods of financing will have to replace it:
- a) Mortgage letter from seller – a possibility; but of limited use partly because estates (death or bankruptcy) will have to sell the letter to a bank and UPS: No credit.
- b) The only route with some promise is if pension funds start their own mortgage banks. It should be in their interest, as real estate with stable debtors is the kind of investment to look for in an unstable environment if you have long term obligations.
The real problem with pension funds as organizers of real estate financing is that prices have far from “bottomed out” (as if there were a bottom!) and the current price slide could risk endangering the pension funds - there is a lot of losses to be taken out there.
Even if you find a leveling off, the next price slide is probably just around the corner. This is where I tend to disagree with everybody: Comparisons to the 1930’ies crisis are way off – what stopped that crisis from further development was the rearmament leading up to WW2 and it is hard to point to a threat to world peace of that magnitude in the foreseeable future. It is hard to point to a period in history with similar lack of war between major states - which means reference to experience is bogus.
So we are in trouble finding a model for how the economy is going to get started for real. As it is investments are underused and not liable to start needing replacements on a larger scale this decade. On the other hand the pension funds to face major payouts due to demographics before that.
The higher payouts and lower pension savings (there aren't enough job to generate savings) will mean there has to be a net sell off of securities in the pension funds. That will tend to bring that source of real estate finance to - if not a stop, then at least a serious slow down.
And if you can't finance then you can't buy a house. So already at the present time we must fear that the just started de-route of home prices will not be stabilised or only stabilised briefly