Denmark: Does the Danish housing market imitate the US?
Thu, Oct 18 2007, 08:54 GMT
by Frank Øland Hansen
- The Danish housing market has experienced a prolonged boom and a subsequent slowdown, which in many ways resembles the housing market boom and deceleration in the US - albeit with a delay of about one year. Does this imply that the troubles in the US sub-prime market are a forewarning of what is yet to come for Denmark? Due to important differences in the financing structure we do not think so.
- There are several striking similarities in recent Danish and US housing market developments. House price increases peaked in 2004-05 followed by a sudden slowdown. Housing supply has reacted considerably to demand, although later in Denmark than the US. And the number of homes available for sale has increased sharply. The main drivers of the housing boom have indeed been the same in Denmark and the US, namely falling interest rates, financial innovation and growth in disposable incomes.
- There are, however, important differences in the financing structure of the two housing markets. First, there is no sub-prime sector in Denmark. Credit evaluation is fairly uniform and it is more thorough than in the US sub-prime market. Secondly, credit risk is typically not resold and repackaged. Danish mortgage institutions put the mortgage loans on their books and finance them by the issuance of bonds with corresponding coupon and maturity. As a result, teaser loans are almost non-existent.
- Due to the abovementioned differences the Danish housing market does not face the same headaches as the US. On the other hand, the Danish housing market has become slightly more sensitive to interest rate increases than the US because of a widespread use of ARMs.
