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Danish Housing Bubble Leads Industry to Look to German Model

Boats sit moored in the canal at Nyhavn in Copenhagen. Denmark is the only Nordic country at risk of lurching into a recession, as falling house prices and rising joblessness erode consumer confidence and undermine demand. Photographer: Chris Ratcliffe/Bloomberg
Boats sit moored in the canal at Nyhavn in Copenhagen. Denmark is the only Nordic country at risk of lurching into a recession, as falling house prices and rising joblessness erode consumer confidence and undermine demand. Photographer: Chris Ratcliffe/Bloomberg

Nov. 30 (Bloomberg) -- Denmark’s home-loan industry, the world’s biggest issuer of mortgage-backed covered bonds, is looking to Germany to avoid a repeat of the housing bubble that sent Scandinavia’s weakest economy to the brink of a recession.

Realkredit Danmark A/S, Denmark’s second-largest mortgage lender, wants the $495 billion industry to reject loan applications if house prices exceed what German banks call the mortgage lending value, which strips out temporary price fluctuations to arrive at a long-term valuation.

“When mortgage banks come forward and say, ‘We cannot go to market value,’ that would send a powerful signal” that there’s a bubble in the making, said Klaus Kristiansen, executive vice president of asset liability management at Realkredit Danmark, the mortgage unit of Danske Bank A/S. “Those warnings weren’t clear enough in the 2000s.”

Denmark is the only Nordic country at risk of lurching into a recession, as falling house prices and rising joblessness erode consumer confidence and undermine demand. Household sentiment dropped this month to its lowest in more than two years. The government on Nov. 3 cut its forecast for private spending this year to a 0.6 percent contraction, versus its previous estimate for growth.

Denmark’s economy shrank more than economists surveyed by Bloomberg estimated in the third quarter, contracting 0.8 percent from the three months through June, the statistics office said today.

‘Worrying’ Development

“It’s worrying because it’ll be more difficult to reverse the development,” said Steen Bocian, chief economist at Danske Bank. “In contrast to 2008-2009, there’s not much room for a more expansive fiscal policy.”

Denmark’s Social Democrat-led government, elected in September, said this month it will appoint a committee to investigate the causes of the financial crisis, including what role Denmark’s real estate market played. It sees the budget deficit widening to 5.1 percent of gross domestic product next year, more than the euro area average shortfall of 3.4 percent, according to the European Commission’s Nov. 10 estimates.

“For sure we have an interest in lending out as much as we can,” Kristiansen said. “On the other hand, we have an even greater financial interest in long-term sustainability, so if this measure could actually stabilize house prices, it would be worth doing.”

Meeting Resistance

Still, Realkredit’s proposal is meeting resistance. The mortgage industry is divided over what role it played in fanning the housing bubble and what measures, if any, it should take to avoid another.

Affordable mortgages have made homeownership possible for about 50 percent more Danes than Germans, and adopting Germany’s model could limit homeownership to older, wealthier people, according to Ane Arnth Jensen, director of Association of Danish Mortgage Banks.

“In theory, I agree but who knows when there’s a bubble, and who’s going to set the price?” Jensen said in an interview. “Who is smarter than the market?”

The association rejected calls by the central bank earlier this year to discontinue interest-only loans, which Governor Nils Bernstein said are destabilizing the market. It also rejected a proposal by its rival, the Danish Mortgage Banks’ Federation, to reduce refinancing risks by eliminating the one-year bonds that fund 20- and 30-year adjustable-rate loans. The association cited consumer and investor demand. Refinancing auctions this month have resulted in near-record low yields.

Policy Role

“It’s the fiscal policy that has to take care of the overheating of the economy and stimulating the economy,” said Soeren Holm, head of finance at Nykredit A/S, Europe’s biggest issuer of mortgage-backed covered bonds and a member of the association. “I don’t see at all how a mortgage lending value can do anything about that.”

By the end of next year, average home values in Denmark will have dropped 25 percent since peaking in 2007, according to the government-backed Economic Council. Denmark’s $325 billion economy probably will contract 0.1 percent in the fourth quarter, Danske Bank, the country’s biggest lender, said earlier this month.

In Germany, prices for owner-occupied housing have climbed about 6.1 percent in the four years through Sept. 30, according to the Association of German Pfandbrief Banks. Economic growth will reach 2.9 percent this year before slowing to 0.8 percent next year, the European Commission said Nov. 10.

Home Ownership

About 43 percent of Germans own their own homes, according to the German association. That compares with at least 64 percent in Denmark, figures from the country’s statistics agency show.

Adopting Germany’s mortgage lending value also would reduce mortgage banks’ need to raise additional collateral, according to Realkredit’s Kristiansen. “It is very expensive for us to see house price come down 20 percent,” he said.

The lenders, which fund virtually all home loans in Denmark, can issue covered bonds against 80 percent of a property’s market value. If prices fall, lifting the loan-to-value ratio above 80 percent, lenders must provide more collateral to restore the ratio.

‘Critical Periods’

In a declining market, selling junior covered bonds to raise the collateral may be impossible, potentially creating financial instability, the Danish association warned in its 2010 report. It recommended measures that would lift the collateral requirement during “critical periods.”

In Germany, banks issue covered bonds against 60 percent of mortgage lending value, according to the Pfandbrief association. Covered bonds fund about one-fourth of mortgages, with savings bank and credit cooperative loans funding most of the remainder.

Denmark’s central bank said it is awaiting the passage of a European Commission proposal that would allow countries to set tighter loan-to-value limits during periods of high lending growth. The bank also recommended earlier this year that lawmakers lift a cap on property taxes.

The commission’s proposal offers another way to “mitigate future house bubbles,” central bank spokesman Karsten Biltoft said in an e-mailed reply to Bloomberg questions.

Danish mortgage banks issued 148 billion euros ($200 billion) in mortgage-backed covered bonds last year, almost twice the amount sold in second-ranked Sweden and more than three times that of Germany, according to the Brussels-based European Covered Bond Council.

“It’s important that we have a dialogue on where we should go and what needs to be adapted,” Kristiansen said. House prices could drop 2.5 percent next year, he said.

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at

To contact the editor responsible for this story: Christian Wienberg at

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