Danes as Most-Indebted in World Resist Credit and Mortgages

Mortgage borrowing slowing down is not necessarily a bad thing

Pedestrians look at residential apartments and houses displayed for sale in the window display of an estate agent in Copenhagen. Danes’ personal debt is 267.31 percent of income, according to Eurostat data compiled by Bloomberg.

By Frances Schwartzkopff

Danes, the most indebted people in the world, are losing their appetite for credit.

After amassing personal debt equal to almost three times income, mortgage borrowing grew at the slowest pace last quarter since 2000, the Association of Danish Mortgage Banks said this month. Bank lending at Nordea Bank Denmark A/S, the country’s second-largest lender, fell to its lowest in more than a year.

From a risk perspective, it’s good that consumers are deleveraging,” Anders Jensen, chief executive officer of Nordea Bank Danmark A/S, said in an interview. “From an income perspective, we won’t make any money from lending.”

Denmark is the Scandinavian economy hardest hit by the global financial crisis. Households have watched their personal wealth drop by 400,000 kroner ($69,900) on average since theproperty market peaked in 2007, according to Danske Bank A/S. (DANSKE) After the real estate bubble burst in 2008, house prices plunged more than 20 percent, wiping out more than 12 banks and driving the economy into a recession that lasted into 2009.

Gross domestic product contracted 0.5 percent in 2012, the country’s worst economic performance in three years. Consumer spending, which makes up half the $300 billion economy, dropped 0.1 percent in the fourth quarter, declining for a third consecutive period,Statistics Denmark said April 4.

Denmark’s government estimates the economy will grow 0.5 percent to 1 percent this year, less than both Sweden and Norway. While Denmark’s krone peg to the euro has protected exporters from currency gains, the nation’s housing crisis has undermined consumer confidence.

Spending Declines

Against that backdrop, consumers don’t dare borrow more, said Las Olsen, a senior economist at Danske Bank. Danes are taking advantage of lower interest rates to make bigger principal repayments on their mortgages, central bank data showed today.

In the first quarter, homeowners amortized 7.5 billion kroner, compared with 6.7 billion kroner a year earlier, the central bank estimates.

“When rates are low, the principal payment makes up a larger portion of a debt instalment,” Ane Arnth Jensen, head of the Association of Danish Mortgage Banks, said today in a note. “That’s what we’re seeing now, with an average effective rate on mortgages at an historic low of 2.9 percent.”

Denmark’s central bank, which defends the krone’s peg to the euro, has held its deposit rate below zero since July to counter a capital influx into the AAA rated economy. The benchmark lending rate is 0.3 percent and the deposit rate is minus 0.1 percent.

Austerity Mood

Spending on homes will contract by 0.6 percent after falling 9.8 percent in 2012, and won’t recover until 2014, the Danish central bank estimates. Private consumption will increase by 0.7 percent this year after growing by 0.5 percent in 2012, according to the Copenhagen-based bank.

Even with the country’s public debt burden at less than half the euro-zone average, the slump has changed consumer behavior into self-imposed austerity. While Danes’ record personal debt load is backed by the world’s highest pension savings, “that’s not money that’s easily accessible,” Olsen, wrote in an e-mailed note. “We shouldn’t expect a recovery in private spending any time soon.”

Danes’ personal debt is 267.31 percent of income, according to Eurostat data compiled by Bloomberg. By comparison, Sweden’s ratio is 148.77, the Netherlands is 250.45, and the U.S. is 93.87 percent.

Deleveraging will continue through 2013, said Lasse Nyby, chief executive officer at Spar Nord Bank A/S (SPNO), Denmark’s fourth- largest listed lender.

‘Natural Reaction’

That’s a “natural reaction to the gearing which took place in the Danish economy during the 2000s,” Nyby said. “Even though we had a net inflow of 2,500 new customers, we’re still experiencing existing customers repaying at a faster pace than we can lend out to new customers.”

Homeowners and banks also face a further setback from a group of borrowers that took out loans last decade that gave the option of paying just interest for 10 years. This is the first year the borrowers will have to start paying down principal with the mortgages requiring the loan-to-value to be below 80 percent to keep the same terms in place.

About 1,200 of the 4,700 households affected by the requirement in 2013 have seen their loan-to-value ratios swell above an 80 percent legal limit, according to the Business Ministry. The Mortgage Bankers’ Federation says those figures by far underestimate the real number of households affected. That means homeowners’ payments could soar, and banks will face higher writedowns.

Seeking Exemptions

The mortgage industry had sought exemptions from the amortization requirement, a plea the government rejected, arguing it would undermine trust in the nation’s $500 billion mortgage-bond market, which has the highest volume of covered bonds per capita in the world.

“The system is strongly supported by domestic demand,” said Bernd Volk, head of European covered bond research at Deutsche Bank AG. “As long as Denmark has a current account surplus, the system is likely to remain stable.”

As a result of the amortizing loans, mortgage banks may be forced to write down more loans this year, said Karsten Beltoft, head of the federation in Copenhagen. How much will depend on customers’ finances and the size of LTV breaches, he said.

The average sales price for a single-family home was unchanged in January compared with a year earlier and down 5.9 percent on the month, the Danish statistics agency said April 5. Unemployment, including people in vocational training programs, was 6 percent in February compared with a low of 2.5 percent in July 2008.

Main Obstacles

“You still have uncertainties about unemployment and house prices, which are the two main obstacles that you have to remove if you want to get a little more growth in private consumption,” Nyby said.

As Danes stop borrowing and spending, they’re placing more money in their banks. Consumer savings climbed in March to the highest level since at least 1991. Deposits rose 6.7 percent to 844.8 billion kroner from a year earlier, the central bank said last week.

The government of Prime Minister Helle Thorning-Schmidt has extended tax rebates for Danes refurbishing their homes in an effort to encourage spending. Stimulus measures total 75 billion kroner ($13 billion). Government measures and savings ratios mean “there is room for more consumption, but it’s probably not going to happen,” Nyby said.

That may not be a negative development, according to Deutsche Bank’s Volk. “In a country with very high household mortgage debt, mortgage borrowing slowing down is not necessarily a bad thing.”