Danish Housing Rescue Faces Bank Opposition as Risks Add to Market Stress
Denmark’s banks signaled they will resist a government plan to have Danes buy new homes before they sell their existing properties, arguing the proposal adds risk to an economy already stressed by a bank crisis and recession.
The minority coalition of Prime Minister Lars Loekke Rasmussen this week unveiled the plan in an effort to breathe life into the housing market after the number of properties for sale soared to a record last month. Banks representing more than 80 percent of the country’s home loan market are warning that the government’s approach will leave households more indebted and impede a balanced recovery.
At Copenhagen-based Danske Bank A/S, the country’s biggest lender, home loans are always based on “an individual assessment, but as a rule of thumb the first property needs to have been sold,” said Martin Sandau, chief consultant at Danske, in an e-mailed reply to questions. “Before the housing market ground to a halt, the practice of buying before selling was more widespread, but the current market is too uncertain.”
A housing slump and banking crisis have turned Denmark into Scandinavia’s worst-performing economy. Rasmussen, who faces an election no later than November, wants to spend 10.8 billion kroner ($2.1 billion) through 2013 in measures to jumpstart growth as he competes with opposition proposals to spend even more. The stimulus won’t help Denmark escape an adjustment that may be “long and perhaps painful,” according to Jes Asmussen, Svenska Handelsbanken AB’s chief economist in Copenhagen.
“A relaxation of credit policies could bring some customers into trouble,” said Lars Holst, a vice director at Copenhagen-based Nykredit A/S, Europe’s biggest issuer of covered bonds backed by mortgages.
Banks are already fielding criticism from Denmark’s financial regulator that they gave too many risky property loans during the economic boom years, exacerbating the country’s financial crisis. Denmark’s lenders, which wrote down 94 billion kroner of bad loans in 2009 and 2010, also face “large” loan losses this year, mostly in real estate and farming, the regulator said in May.
Danish lawmakers today agreed on the country’s fourth bank bill since 2008 in an effort to spur takeovers and sidestep the European Union’s harshest resolution rules. The package, which amends laws that triggered senior creditor losses in bank insolvencies, will allow the state to assume troubled lenders’ bad loans in the event of takeovers. The cost of the plan, which also allows merging banks to tap the depositor guarantee fund, will be borne by the industry.
The country’s banking crisis has claimed two regional lenders this year, triggering a liquidity squeeze that Standard & Poor’s warns could push 15 more banks into default over the next three years. Most of Denmark’s roughly 120 banks can’t access international funding markets after the country’s resolution laws triggered senior creditor losses.
House prices dropped 1.9 percent in the first quarter from the final three months of 2010, the Association of Danish Mortgage Banks said this week. The development marks a “significant worsening” in the property market, the association said.
At the Danish unit of Nordea Bank AB (NDA), the biggest Nordic lender, customers may be allowed to double up on their mortgages if such a move is financially viable for the individual, the bank said. That may not hold for a large portion of the population.
Unable to Pay
More than one in eight Danes between 18 and 70 said it’s either “very likely” or “likely” that they won’t be able to pay their fixed costs should a new crisis hit the Nordic country, according to an Ugebrevet A4 survey published Aug. 15 by newswire Ritzau Finans. One in four said they feared losing their job, the survey showed. Unemployment held at 5.9 percent in June after rising in May, Statistics Denmark said July 28.
“If a bank adviser decides that a customer’s finances are strong enough, he can win approval to buy a new home before the old one is sold,” Nordea press spokesman Claus Christensen said in an e-mailed reply to questions. “In practice, it will generally be difficult to do this” given the market today compared with before the financial crisis. “The starting point is that a customer needs to sell his existing property before buying a new one.”
“The estimate seems a little optimistic,” said Las Olsen, an economist at Danske Bank. “Prices are already about 5 percent lower than at the turn of the year.”
Denmark will post a budget deficit equivalent to 3.8 percent of gross domestic product this year and 4.6 percent in 2012, the Finance Ministry estimates. Debt will widen to 44.4 percent of the economy next year from 43.6 percent in 2011.
The government’s proposals to end the recession and boost the housing market are “more politics than economics,” said Jacob Graven, chief economist at Sydbank A/S. “The possibilities for stimulating growth are limited all over the world, including Denmark. We may be looking at a double-dip.”
To contact the reporter on this story: Peter Levring in Copenhagen at email@example.com