Danish Housing Debt – The Problems are Only Getting Worse

Danish Housing Debt – The Problems are Only Getting Worse
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Danish Housing Debt - The Problems are Only Getting Worse

There was an interesting article in the  Wall Street Journal by Matthew Dalton on Danish private sector debt.
Below we provide further insight on the topic.

For the sophisticated reader:

Those in debt and insolvent are the big consumer households – that is families with (younger) children. We can be fairly certain of that, as the boom prices were from 2005. These families have not been in employment long enough to accumulate any savings worth mentioning.
Those with savings are the over 50 with a modest debt – especially those living in rental apartments; but also the graying temples in houses bought before 2000. There is a limit to how many rounds of golf you can play – and people in nursing homes are not liable to party violently and expensively. No amount of “kick-start” will make them spend more. That is the real brake on private consumption.
Matthew Dalton writes optimistically about:

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Deleveraging of household debt

This isn’t going to happen!
If you follow the rise in private housing real estate debt plus bank house debt with over 5 years maturity – I continues to rise with very nearly the speed of house sales. Indicating next to nothing is amortized!

Furthermore it does indicate, that only debt free (or near enough) houses are being sold. The rate of increase in debt has reduced to pretty much the drop in price times the drop in sales – say price drop to 4/5 and sales drop to 2/3, then revenue drop to 8/15 or approximately half – which is indeed the case for the drop in the rate of increase of real estate debt.

This indicates only debt free houses are being sold – and mortgaged.

The difference in view is probably due to the different statistical methods of the official Statistics Bureau, which considers all sales from registry office data. The mortgage banks association publishes figures on financed sales through the mortgage banks. Matthew Dalton understates the gravity of the situation.
The price drop for houses and condominiums in the metropolitan Copenhagen area is 27% and 33% respectively – It is the area highest in debt with the most expensive property. Volume about 25% down. Which give 3/4 times 3/4 equal 56% for houses and 3/4 times 2/3 equal ½ for condominiums.
I totally concur with Matthew Dalton that there is no way out through stimulus packets; but:

He has gotten the pegging of the DKK to the EUR the wrong way!

The simple truth is that the DKK is in danger of being REvalued, not devalued. There is currency reserve of approximately 100 billion USD! The Central Bank is fighting revaluation tooth and interest. It is difficult to debase a currency that has a positive and increasing balance of payment surplus – due to exporting stuff like oil, pharmaceuticals and bacon.

The Prime Minister has gained notoriety for her firm, but totally conflicting statements – in the same breath.

Can the policy makers do anything? Here I’m more optimistic.
Foreclosure on the scale indicated is out of the question we are talking ¼ million households out of 2½ million at present (and falling) inflated prices – can’t be done.
The nitpicking observer has seen signs that the statistical bureau is cross referencing the housing statistics with tax returns (interest is deductable) and with population statistics.

  • This normally signals a hammer blow to the banks (mortgage and otherwise).
  • We saw the same thing coming with the agricultural loans where land valuation changed from sales prices to economic defensible prices.
  • We are seeing it with developers as banks flop and end up in the garbage bin.
  • We see it with pension funds where their mortality statistics are being revised.

The pension fund will probably reveal, that very little can be gained by letting real estate debtors pay off with their pension savings. So what remains?
Well no amount of waving with the macroeconomic wand will do anything but pull a shoulder. No it will be the cutlass of taxing pension savings (half of is deferred taxes anyway).
The process will probably be this: The banks are going to be nationalized and recapitalization will come from expropriated pension savings.
It is not an avenue of choice, but of necessity!
To put this into perspective you could read this from Bloomberg:

The salient point is that the CEO of the German Central Bank Jens Weidmann has written to the President of the European Central Bank Mario Draghi warning about the risks the central bank is taking in using banks own issued bonds as collateral.
This will bring Danske Bank in trouble, as they have borrowed 40 mio. DKK (41 according to Danske Bank) in the ECB – more likely than not they use variable rate real estate bonds issued by their mortgage bank (Realkredit Danmark) as collateral. It is difficult to imagine that “Uncle Nils” (I call him that affectionately as banks are always trying to hock their junk at his shop) can avoid issuing a similar warning to Draghi considering he himself does not accept own issues as collateral.

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