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« Too Much (panic) too Soon? | Main | Dollar Bears on the Return? »
Sunday
Mar182007

Fears of Frothy House Markets?

As the housing correction in the US subprime mortgage market and perhaps beyond continues at a hefty pace the sentiment in other countries with frothy house markets is beginning to become chilly as well. A notale example here is for example Spain which have enjoyed an asset price boom in the housing sector the recent years. As such, the looming crisis in the US has prompted the Bank of Spain to go out in the national newspaper El Pais (in Spanish) (hat tip Eurointelligence) to quell worries of an impending correction in Spain's housing markets. Among the points noted were first and foremost the Bank of Spain's expectations of a gradual normalization process in a housing market which after all features a hefty overvaluation of between 24% to 32% according to national estimates. Another point emphasized by the Bank of Spain was that default rates in Spain are not very high (0.4%) compared to the current default rate in the US (4.6%). Finally, In terms of the transmission mechanisms between the US housing correction and the European economies, Wolfgang Munchau from Eurointelligence has an interesting note up.

What about Denmark then?

However, what about my own country then? Well, first of all it is pretty obvious that Denmark qualifies quite nicely for slot in the group of nations which have enjoyed a more than impressive run recently in terms of its housing market. The most notable evidence of this is that Denmark for (I think) the fourth consecutive time claims first place in the Economist's house price index which reports that house prices climbed 23.3% y-o-y in Q4 2006 relative to Q4 2005. In essence, the rising house prices in Denmark and the risk that they might fall at some point should not surprise anyone but since prices recently, especially in Copenhagen which after all inhabits about two fifths of the Danish population, have been falling or stagnating Danish economic analysts are begging to voice concerns over the potential for a collapse in the Danish house market, especially in Copenhagen (Danish content!). I won't quote Danish content here but one of Denmark's leading researchers on house markets Jens Lunde from the Copenhagen Business School notes the risk of a general depreciation of up to 25% in his analysis in which he also describes the Danish house markets as balancing on a knife's edge. Also chief analyst of Danske Bank Steen Bocian chimes in and joins the worrying crowd. Of course, these worries do not fall from the sky as jolts of lightening at least not if you have been reading the latest economic survey from the OECD on Denmark where the following quote nicely sums up the view on the Danish house market ...

Since 1995, house prices have increased substantially with an average yearly growth rate of 8% (6% real).8 The ratio of house prices to disposable income has risen over the same period by 70%. This has supported consumption growth, not least because the increased flexibility of the mortgage market made it easier to borrow against higher house price values.

Over the last year, the speed of price increases has been particularly strong: During 2005, house prices rose at double-digit annual rates, reaching 21% in the fourth quarter – the largest increase in nearly 20 years – and this trend continued at the beginning of 2006. While there are good fundamental reasons to believe that house prices should be higher today than in 1995, recent growth rates look increasingly exaggerated and it seems likely that further price increases would bring valuations significantly out of line with fundamentals.

Also the Economist Intelligence Unit's annual report (2007 (sorry no link available) notes how the Danish economy might be slowing down going into 2007. A notable sign is private consumption which has slowed down considerably on a y-o-y quarterly basis in 2006 with a 4.9% annual growth rate in Q1 2006 to 1.8% in Q3 2006. Especially the purchase of vehicles contracted considerably from Q3 (12.1%) to Q4 2006 (-1.2%). On house prices per se the EIU also notes the risk of a sharp correction which naturally would dampen private consumption even further.

Some Stylised Facts on Denmark then ...

Since I have just recently really learned how to master the stats creating engine of the Danish statistical office I thought I would end this one with some graphs of the developments in the Danish house markets in the recent years. Let us begin with sales of one family houses which give a pretty impression of the general and also of how the market might be slowing down going into 2007. The first graph shows the development from 2002 to 2005.

den.house.sales.jpg 

 

 

 

 

 

 

 

 

 

And now turning to a quarterly breakup of 2006 which shows a decline from Q3 and onwards ...

den.house.sales q06.jpg 

 

 

 

 

 

 

 

 

 

Turning towards the price development the situation mirrors that of sales depicted above. Firstly let us take a look at development in prices from 2002 to 2005 (1995=100) once again in one family houses. As we can see the appreciation has climbing at a pretty hefty clip.

den.house.price.jpg 

 

 

 

 

 

 

 

 

 

However, if we look once again at a break up quarters of 2006 we get an indication that the appreciation might be levelling off. 

den.house.price q06.jpg 

 

 

 

 

 

 

 

 

 

In fact, the graphs above probably don't tell the entire story and as such the appreciation of Danish house prices have concentrated regionally and especially Copenhagen as a region here tells a very important story. As such, we first take a look at price development since 1995 in Copemhagen county we see evidence of a quite remarkable appreciation.

den.house.price CPH 1995.jpg 

 

 

 

 

 

 

 

 

 

Finally, in terms of sales we see the same development in Copenhagen as in Denmark on a general basis with sales of real property (one family houses) dropping rather sharply going out of 2006.

den.house.price CPH q06.jpg 

 

 

 

 

 

 

 

 

 

 So, there you have it. Not quite the worrying tendencies we see in the graphs from the US but a correction is definitely coming (and indeed overdue) in Denmark but it remains to be seen how severe its impact will be on the general macroeconomic environment. I think that especially the correction in Copenhagen and its anatomy will be a telling sign, so my advice; watch Copenhagen!

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Reader Comments (8)

It would be interesting to know if Danish lenders have been using what in the US are known as "exotic" loan structures such as adjustable rate mortgages and loans with low "teaser" rates that allow low income individuals to afford payments for the first year but then the rate jumps up and the payment becomes unaffordable. Also common have been "no-doc" loans where the prospective borrower didn't have to provide any proof that they had regular income that would allow them to make their mortgage payments.
March 21, 2007 | Unregistered CommenterScott Peterson
Hi Scott,

Well, your hunch is right and there is indeed a big difference between the loans supplied in the US and Denmark. Especially the recent unravelling of the subprime market in the US reveals some mortgage practices which are not present in Denmark. Having said that we do have adjustable rate mortgages but many customers opt in for a rate ceiling although that some households even in Denmark have been pinched when rates have gone up. Another loan type we have which has sparked considerable more controversy is the 'non-downpayment' loan which basically gives you 10 years (usually out of 30) where you can 'opt'of paying the downpayment on the loan (i.e. you service only the interest rate). Usually these ten years are spent on the first 10 years on the loan which of course means that the last 20 years become more expensive.

A whole new loan type which is being put up for sale to customers is a loan which matures over a 100 years which basically means that your are leasing your property from your creditor. Of course the controversy surrounding these loans is that they merely serve to postpone the inevitable (i.e. dropping real estate prices) although official estimates and calculations do not forsee any notable appreciation on the back of these new loans.
March 23, 2007 | Unregistered CommenterCV
My Danish wife and I recently sold our house in Roskilde to live and work in the US for a brief period. We were one of the lucky ones who bought our home in 2004 and sold in late 2006 just as the housing market was beginning to stagnate. However as of recently we have been paying close attention to the market in Denmark as we expect to return in four years time and were shocked to find out that the government recently passed the 100 year mortgage! Given the subprime lending issues that have arisen in the US I would think that Denmark would have been wise enough to delay such bills from being passed as you are correct that this will only delay the inevitable. I can also see many other negative aspects to such a mortgage: 1.) continued real estate speculation and a result in driving up home prices further (even though the real intentions here are to make home ownership affordable in an over-priced market), 2.) continued consumer spending via second mortgages based solely on home equity lines of credit, 3.) robbing many consumers of their primary nest egg thus disolving retirement savings which make them completely dependent on future social security/pension availability, and 4.) creating an even bigger bubble in the housing market that will lead to a possibly much larger correction ultimately having serious implications to the greater economy sometime in the foreseeable future. I always held to the notion that Danes where a fiscally conservative culture, especially when it comes to governement regulation of lending practices but this 100-year mortgage really smells of American-sytle laizze faire capitalism. I am all for free market policies but not at the expense of our retirment and children's future. This is one for the most stupid policy decisions in Denmark I am sorry to say. With dozens of articles in the Danish business precess (i.e., Børsen) alerting us for the past two years of a housing bubble I do not think that this type of mortgage could have come at a worse time.
April 9, 2007 | Unregistered CommenterMichael Winkler
The term "afdragsfri lån" is not non-downpayment. In English it's amortization-free or interest-only, as we call it in the U.S. On the other hand my impression is that first time buyers in DK are in fact pretty much all non-downpayment as they get 100% financing via pantebreve.

I also found what only can be described as a subprime lender in Denmark, which counters the myth of a safe and stable property finance market:

http://www.bolig-laan.dk/index.php

Note the last paragraph. For non-Danish speakers it says that the company offers 100% financing and bad credit does not necessarily matter............

The inter-generation 100 year loan was of course launched in Japan before their market crashed..... . I saw a statistic that the average loan duration of Stockholm condos was close to 100 years.
July 5, 2007 | Unregistered CommenterFrank
Hi Frank,

Thanks for the comment and the clarifications.In general, I agree with you. It remains to be seen just how resilient the famed Danish institutions are once the high interest rates begin to bite.
July 5, 2007 | Unregistered CommenterCV
I kept Googling for toxic loan products in Denmark and found many websites. One, for example, offers 108% LTV.

http://www.logf.dk/total.html

How common are these loan products. Do they also issue bonds like the normal financing.

I also find it astounding that the fact that the Danish mortgage bond market is more than GDP is heralded as a good thing. It just shows that you are leveraged up to your eyeballs......

This was an interesting article in Bloomberg. http://www.bloomberg.com/apps/news?pid=20601109&sid=a6BPpvoE1jOA&refer=home

``Since we do not have any subprime loans in Denmark, the credit of mortgages remain among the best in the world,'' he said.

What BS, eh? The author also implies that all Danish home loans are capped at 80%. That's factually wrong; most first time buyers get second mortgages up to 100% (or more). I wrote to her about the article and she defended it by saying that she had talked to experts in the UK. It's exactly the same as in the U.S. You can get fixed rate loans up to 80% when you have good credit and enough income, but in expensive areas people typically get second mortgages. This whole subprime mess came about because unqualified people sought and were offered alternate loans to join the mania. These people are the marginal buyers who support the house cards. In the U.S. they have been decimated and our housing markets are crashing.
July 5, 2007 | Unregistered CommenterFrank
If you want to sell your real estate in europe or when you are looking for a property to buy you should visit www.PropertyMarket.eu
This is a free website for the European Property Market.
April 4, 2008 | Unregistered CommenterMaurice Vinci
1 from the main variations in between a website along with a static web page will be the way individuals are capable of interact with the written content. What do you take into consideration that? I've many ideas but need to have to assume twice. Wish your tommorrow will likely be much better.
October 26, 2010 | Unregistered CommenterNike Shox Nz

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