Danes are betting the five-year slump in home values will deepen as record low interest rates fail to entice prospective buyers.
Prices, which have already plunged 25 percent since their 2007 peak, will decline 5.5 percent this year, the government estimates. Record-low interest rates that translate into average borrowing costs of less than 0.1 percent have so far failed to resurrect home values as buyers wait for sellers to buckle under record-long sales times and cut prices lower.
“Low interest rates don’t help the market today because people have the sentiment: why not buy tomorrow instead of today?” Soeren Holm, group managing director of finance at Copenhagen-based Nykredit A/S, the country’s largest mortgage lender with 47 percent of the market, said in an interview. A combination of “fear” and “economic opportunism” has gripped the market, he said.
When Denmark’s real estate bubble burst more than four years ago, it threw the economy into a recession and triggered a regional banking crisis that’s claimed a dozen lenders. While the government enjoys debt levels that are less than half the euro-area average, Danes’ private debt loads are the world’s highest at more than three times their disposable incomes, BNP Exane SA estimates.
Even as house prices have slumped, investors have been increasingly lured to Denmark’s $444 billion bond-backed mortgage market, the world’s third-largest after its U.S. and German counterparts.
A Nykredit index of Denmark’s most-traded mortgage bonds touched an all-time high at the end of last week as investors sought alternatives to euro-denominated assets tainted by the region’s debt crisis. The measure has returned about 2.5 percent this year and 33 percent since September 2008, after Lehman Brothers Holdings Inc. collapsed, outperforming U.S. Treasuries with maturities of more than one year.
Bonds financing the cheapest Danish home loans with annual rate adjustments yield less than 1 percent. The average interest rate paid on all loans was 3.314 percent in May, down from 3.324 percent in April, the country’s central bank said June 28. Taking tax deductions and inflation into account, the interest rate paid by most households was 0.06 percent, according to the Danish Mortgage Bankers Federation.
None of this has made much of an impression on potential home buyers.
“At the moment, the housing market is being hit by negative psychology,” Lise Bergmann, a housing economist with Nordea Kredit, a unit of Nordea Bank AB, said in an e-mailed response to questions. “The economic consequences of losing your job play a greater role for homeowners than the low rates.”
Realkredit Danmark A/S, the mortgage unit of Denmark’s biggest lender, Danske Bank A/S, estimates that negative consumer sentiment is more harmful to house prices than rising borrowing costs. Central bank Governor Nils Bernstein has warned that Denmark’s housing market risks sliding into a self-perpetuating downward spiral as expectations drive values lower.
In a June housing-market survey, 73 percent of 1,032 potential home buyers said they’re trying to time their purchase to get the most out of price movements. The survey was conducted by independent Copenhagen-based listing site Boliga ApS. Fifty-two percent said the market is dysfunctional, and half said they’re willing to wait one to three years to purchase at the right price.
Some sellers are trying to hold out while others are taking their properties off the market. The average number of days a house sat on the market jumped 27 percent in June from a year earlier while offer prices declined 4.7 percent, the Association of Danish Mortgage Banks said July 12. The number of homes removed from the market climbed 17 percent in June from a month earlier, to 5,019, and was up an annual 11 percent.
As values continue to sink, households’ debt-to-property ratios are swelling. Homes make up 76 percent of the 3.4 trillion kroner in assets that Danish families hold, excluding pensions, according to the central bank. So far their ability to refinance that equity at lower rates has helped insulate banks from the rising debt. If unemployment worsens, though, bank losses will also rise, the central bank said last month in a special review.
“The very low interest rates have put somewhat of a brake on house prices falling, but the big question is to call when we have hit the bottom,” Andreas Hakansson, a Stockholm-based bank equity analyst at Exane, said by phone. “Once interest rates rise again, we’ll see further downside. Families would be better equipped to handle it if they didn’t have so much debt.”
Home equity has almost been halved since 2007 as prices have fallen and homeowners borrowed more. Equity dropped 3.9 percent to 905 billion kroner in the first quarter from a year earlier4, bringing losses since the market’s 2007 peak to 770 billion kroner, or about $88,500 per household, Nykredit said July 16.
The number of foreclosures rose 9 percent in June from the previous month to 452, adjusting for seasonal swings, Statistics Denmark said on July 5. That compares with an average of 103 foreclosures a month in 2006, one year before house prices started falling, according to the office.
Denmark’s haven status has been underpinned by its low public borrowing and a mortgage bond system that protects investors.
Mortgage banks issue bonds on behalf of borrowers in the amount of the loan granted. Credit risk is minimized by borrowers’ legal obligation to repay loans even in the event of a foreclosure and by a bank resolution framework that protects collateral for investors.
Government debt will be just over 40 percent of Denmark’s gross domestic product this year and next, the European Commission said in May. That compares with just over 90 percent on average for the 17 nations sharing the euro, the commission estimates. Household indebtedness in Denmark, which enjoys a current account surplus, is backed by the world’s second-highest savings ratio, after the Netherlands, the central bank estimates.
The Danish central bank lowered the rate it offers on certificates of deposit to an unprecedented minus 0.2 percent on July 5 in an effort to protect the krone from a capital influx that’s put pressure on its euro peg. The benchmark lending rate was reduced to 0.2 percent, following a quarter-point cut in the European Central Bank’s main rate to 0.75 percent.
Households have watched Denmark’s gross jobless rate, which includes people in vocational training programs, rise to 6.2 percent in May from as low as 2.5 percent in the months before Lehman’s collapse lurched the global economy into the worst financial crisis since the Great Depression.
Unemployment will probably climb further, Jes Asmussen, chief economist at Svenska Handelsbanken AB in Copenhagen, said in a June 28 research note. Denmark’s economy isn’t growing enough, and businesses aren’t planning to hire, he said.
Gross domestic product grew a quarterly 0.4 percent in the three months through March, ending a recession that started in the second half of 2011. Denmark’s economy probably will expand 1.2 percent in 2012, the central bank said June 14.
The key to a housing-market recovery is a broader economic rebound, Bergmann said. That might come in 2013, Nordea estimates.
“When the Danish economy gets into gear again and unemployment falls, most of that negative sentiment will disappear,” Bergmann said. That may help house prices recover as much as 2.5 percent in 2013, she said.
So far the data don’t support a recovery. House prices fell an annualized 7.4 percent in the first quarter, the biggest drop since 2009, the mortgage-bank association said on June 20. The average time on the market before a sale reached 230 days, the longest wait for sellers since the Copenhagen-based organization began compiling the data in 2004.
While house prices should now be close to their “natural equilibrium,” Bergman said, there is “still a risk prices will fall further, and that we come into a situation where prices drop more than the underlying economics would dictate.”