Bloomberg News

Denmark’s Housing Market May Tumble Amid 25% Overvaluation

September 19, 2011

(Updates with share price moves in sixth paragraph.)

Sept. 19 (Bloomberg) -- Denmark’s property market may be facing another correction after a housing boom that turned to bust at the height of the financial crisis failed to push prices low enough to entice buyers.

The Nordic country’s housing market may still be as much as 25 percent overvalued, according to Jes Asmussen, chief economist in Copenhagen at Svenska Handelsbanken AB.

“Denmark is at risk of getting trapped in a very, very slow growth environment,” Asmussen said in an interview. “There’s a risk that we will lose credibility in the financial markets in the long run.”

House prices plunged 16 percent from a 2007 peak through the first quarter of 2009 as a construction and lending boom ended. The collapse triggered a banking crisis that has claimed more than a dozen lenders and turned Denmark into Scandinavia’s worst-performing economy. House prices dropped an annual 3.2 percent in the second quarter as the market remains “frozen” and properties for sale reached a record high, the Association of Danish Mortgage Banks said Sept. 15.

While Asmussen doesn’t expect the property market will suffer a sudden drop, prices will probably fall about 5 percent this year and 2 percent in 2012, he said. Any increases in subsequent years will only feed through “very slowly,” he said.

Bank Shares

Shares in Danske Bank A/S, the parent company of Denmark’s second-biggest mortgage lender Realkredit Danmark A/S, dropped as much as 5.3 percent today and were trading 4.1 percent lower at 66.45 kroner at 1:22 p.m. in Copenhagen. Denmark’s benchmark OMXC20 Index lost 1.2 percent. Nykredit, the country’s biggest home loan provider, isn’t listed.

The new government led by Social Democrat Helle Thorning- Schmidt, who won last week’s election after pledging to spend more on welfare, has proposed suspending some property taxes in an effort to revive the housing market. Failure to resurrect the market may undermine any recovery prospects for the Danish economy.

“The economy is highly dependent on the housing market getting into gear again,” Niels Roenholt, a senior economist at Jyske Bank A/S, said in an interview. “If we want to see high growth in the economy, we have to see a turn-around in the housing market.”

The difference between the yield on Denmark’s 10-year government bond and similar-maturity German bunds grew to 25 basis points today, the widest since Aug. 19.

Near Standstill

Lackluster household spending and weak exports prompted the central bank to cut its 2011 economic growth forecast this month to 1.25 percent from close to 2 percent previously. The European Union said in a Sept. 15 report that the worsening outlook for the sovereign debt crisis may bring the 27-nation region “close to standstill at year-end.”

Denmark’s bond markets have so far enjoyed a haven status amongst investors eager to flee the euro area’s debt crisis. Still, that may change if the country’s housing market doesn’t recover, Asmussen said.

The difference in yield between Denmark’s 10-year government bond and German bunds of a similar maturity has averaged 21 basis points since the end of April, a narrower spread than that of any euro member. At the same time, mortgage auctions have drawn an increasing number of foreign investors, attracted by the relative safety of the country’s covered bonds.

Default Swaps

Yields fell 24 basis points from a year earlier in a Nykredit A/S auction this month. The interest rate on one-year bonds used to finance adjustable-rate mortgages fell to 1.02 percent in a Sept. 13 auction, the country’s biggest mortgage bank said Sept. 14. Investors offered to buy more than four times the amount offered.

Denmark’s central bank, which uses monetary policy to keep the krone pegged to the euro, has also cut rates twice since August to offset krone gains.

Still, credit default swaps on Danish five-year bonds have risen more than contracts on equivalent German debt. Danish swaps have surged 42 percent since the beginning of August, compared with a 29 percent rise for German contracts, according to CMA. Swedish CDS gained 23 percent in the period.

Denmark’s budget deficit will exceed the EU’s 3 percent limit and reach 3.8 percent of gross domestic product this year, before widening to 4.6 percent in 2012, the Finance Ministry said Aug. 24. The average deficit in the euro area will be 4.3 percent in 2011 and improve to 3.5 percent in 2012, according to the European Commission’s latest forecasts from May.

Bubble Fallout

Denmark continues to suffer from the effects of a housing bubble that other European economies largely avoided, Peter Birch Soerensen, an economics professor at Copenhagen University and former so-called Wise Man at Denmark’s Economic Council, said in a Sept. 13 phone interview.

“A lot of housing wealth was destroyed” when the bubble burst, Soerensen said. “Consumers are now saving a lot to partly restore their wealth position.”

Private spending, which accounts for about half of the economy, fell a quarterly 0.3 percent in the three months through June after slipping 0.9 percent in the first quarter, the statistics agency reported Aug. 31.

Government measures to galvanize consumption and revive the economy by giving homeowners tax rebates for refurbishments probably won’t succeed, according to a consumer survey by EDC A/S, Denmark’s largest independent real estate broker.

Paying Down Debt

More than half of those surveyed said they would use extra income to pay off debt first and then save. Asked what they would do with an extra 10,000 kroner a month, 27 percent said they would pay down debt, the EDC poll of 1,300 homeowners showed.

Declining property values are also putting pressure on Danish mortgage lenders to boost collateral buffers. Mortgage banks put up an extra 200 million kroner in collateral in the second quarter to comply with loan-to-value regulations for the covered bonds backing the home loans, the Financial Supervisory Authority said Sept. 15. The banks voluntarily raised their reserves a further 11 billion kroner, the FSA said.

The covered bond rules requiring collateral adjustments if house prices change apply to 69 percent of Danish mortgage lenders. Moody’s Investors Service in June also warned lenders they must raise collateral buffers on adjustable-rate mortgages to keep their Aaa credit grades, citing potential refinancing risks.

“The major risk is that there’s such a large number of houses for sale,” Roenholt said. “Low interest rates should be able to help this somewhat, but no one really knows how this is going to go.”

--With assistance from Peter Levring in Copenhagen. Editors: Tasneem Brogger, Jonas Bergman.

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net or Angela Cullen at acullen8@bloomberg.net


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