Stewed books.

The development in property prices is of more than passing interest if you invest in real estate mortgage bonds. There has to be some sort of value in the Loan to Value fraction.

property price statistics

In Denmark there are two main sources for statistics to property prices/values:

1) The official Statistical Office (Danmarks Statistik). They calculate price developments relative to an old tax assessment that is kept updated. This statistic calculates sales prices relative to the assessed taxation potential. The official statistics don’t care two hoots about square meters or realtors glib talk – and it doesn’t care how it is financed.

2) The Mortgage Bankers Association publicises at (let’s say: irregular) intervals a statistic over the prices according to the property value a mortgage bank has financed. This leaves out sales that have been paid cash – or financed within families.

“Fair market value”

Danmarks Statistik (DST) takes the liberty of using judgement as to which sales are relevant in the calculation of property prices. F.i. they leave out sales among family members as the prices have special relevance for taxation purposes and are not “fair market value”.

But what is more to the point: They leave out “odd” sales where there is doubt about the price reflecting “fair market value” – a concept that is itself under attack when trade is slow.

The graph illustrates the percentage of the total notarised sales are used in the official price calculation.

* Houses (by far the larger share of home owner’s deals) are generally around the 85%-90% mark.

* Forget about summer cottages, as there is a very large proportion that is not mortgage financed – and it is a small segment with various obnoxious characteristics.

* But condominiums: Notice that in the heyday around 85% were considered appropriate to today where the DST considers only 70%-75% of the deals.

What is really noticeable is the very low share of “proper” condominium deals around the end of the year. More than 1/3 of the deals are disregarded!

Houses have experienced a 20% price drop from the top according to both sources. Condominiums however has suffered the same price drop – but only in the Mortgage Associations figures (21% actually), but the official figures say 26%.

This would mean there might be a reason for disregarding 1/3 of the “sales” at the end of the year! This makes the book value of the mortgage banks more than dubious. Another point is that the values End-of-Year are revised in the official figures AFTER the annual report has been published. From what I have been able to check – the mortgage banks figures are not revised once published.

This means that the value of condominiums must be overestimated in the book value at the mortgage banks with as much as 6%. This is not insignificant:

1) When some mortgage banks are tethering close to the legal limit of 80% Loan-to-Value (77% in fact – on AVERAGE), then any investor with any sense of responsibility is feeling his stomach.

2) Now all annual reports are a tale with some deviation from the gospel truth – with some experience you develop a sense of how much prayer there are in the figures – but when you come across a figure that is blatantly manipulated the whole report is thrown into – not doubt; but downright disbelief. Why manipulate?

3) If the real explanation only surfaces after a close study of footnotes to footnotes – hidden in the pretentious gibberish that tends to fill up annual reports where it is deemed essential information to investors to tell what maternity leave is granted to women over 50 – then it is important to keep the funds entrusted to you far, far away from that particular snake oil salesman.

If you haven’t already dropped mortgage bonds like a bad habit you might investigate the property market more in detail. If you do – you will find that one mortgage bank is particularly exposed to condominiums, and that is BRF.

a) BRF has had the highest foreclosures both in numbers and value relative to size. Some years ago i checked every single foreclosure – until I didn’t bother any more. The fact was that the bigger foreclosed properties were “sold to better than book value” – and thus didn’t figure as “property in temporary possession”. Why get stuff off balance, if everything is above board?

b) About a fortnight ago Danske Bank loaned 15 bio. DKK in the CB for 3 years. That money cannot be used to finance Danske Bank’s own issues, so it must be somebody else’s: BRF is the only one that fits the bill. Being bailed out by the Central Bank is never to be whished for.

My point is not to tire the international reader with parochial gossip and slander (though in this case I hope it will mitigate some of my trespasses in the eye of the Almighty); but to point out to what extend you not only should know the annual report, but also the background environment of a security before investing. I never give investment advice, as I simply do not have the time to form a considered opinion of more than maybe a couple of dozen securities, where the majority have a negative recommendation. That is too few to form a portfolio.

Balancing risk does not mean you have to do something stupid to weigh up the profits of sheer dumb luck.