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Investment Research — General Market Conditions
13 February 2017
Research Denmark
Danish households are resilient

Danish households’ debt and the asset situation attract attention from time to time,
as Danish households have chosen to set up their household economy differently
from other countries. We have taken a closer look at households’ financial
situations and our conclusion is that Danish households are resilient. The recent
financial crisis strongly underpins this conclusion. Bank losses on households have
been very modest.

The Danish economy has a significant savings surplus vis-à-vis the rest of the
world. The current account has been in credit for several decades and Denmark
has net foreign assets of 52% of GDP. It would not be advisable from a
macroeconomic point of view for Denmark to increase domestic savings further.

The significant gross debt in Danish households is financed domestically and debt
accumulation is largely a consequence of significant gross pension savings
combined with a low-cost and flexible mortgage system. Therefore, one can
question whether the significant gross debt is a problem, or whether the discussion
is based solely on the Danish economy being different from those of other
countries. Net financial assets have reached 163% of nominal GDP – the highest
level ever and almost twice as high as 17 years ago. Including the value of houses,
the household sector’s net assets amount to 320% of GDP.

Pension savings are in general mandatory in Denmark. The mandatory savings
contributions have been increased significantly since the late 1980s when the
pension system was reformed. Pensions contributions are made by close to all
working Danes excluding the self-employed. The savings rate is typically 10-15%
of gross income. The significant pension assets reduce the need for households to
be debt free at retirement.

Substantial financial assets and liabilities make the Danish economy interest-rate
sensitive – this could be a challenge if the interest rate were out of line with the
business cycle in Denmark. However, this has typically not been the case.
From time to time, the financial situation of Danish households and the financial stability
in Denmark attract attention, especially from abroad. It is often claimed that financial
stability is jeopardised by the significant debt but this conclusion is often based on a flawed
understanding of how Danish households personal finances are organised. When looking
at Danish households’ total economy, the conclusion is different. Danish households are
economically resilient and there is nothing to suggest that financial stability in Denmark is
under threat from the high gross debt. It is correct that Danish households have significant
gross debt, not taking financial assets into account. Households’ financial assets are more
than twice the size of their financial liabilities; thus, households have significant positive
net financial assets, amounting to 329% of annual disposable income or 156% of GDP.
This is the highest level ever and more than twice as high as 17 years ago.
Chief Economist
Las Olsen
+45 45 12 85 36
[email protected]
Important disclosures and certifications are contained from page 1 of this report.
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Economist
Bjørn Tangaa Sillemann
+ 45 45 12 82 29
[email protected]
Assistant analyst
Mark Thybo Naur
[email protected]
Research Denmark
Thus, the large debt is not a consequence of overconsumption by Danish households. It
should be seen in the light of the significant build-up of both financial and non-financial
assets held by households that has taken place in recent decades. Since the late 1980s,
Danes have built substantial pension assets, assets that ensure that the vast majority do not
need to be debt free when leaving the labour market. Pension savings are personal but
typically mandatory in Denmark. The private pension helps to ensure that the public sector
in Denmark is sustainable over time despite the aging of the population, giving greater
economic security for households. In addition, housing wealth has increased substantially
despite the housing market crisis on the 2000’s. Real house prices have increased by 90%
since the beginning of the 1980s. Moreover, property prices will rise over the long term in
line with the growth of the economy.
The role of assets and liabilities is often misinterpreted in the economic debate. Assets and
liabilities always have to match. If I save money, somebody else has to owe me the same
money. My assets are another person’s or sector’s liabilities – this simple fact is often
forgotten in the debate. To make it simple, let us look at a closed economy and a pay-asyou-go pension system. If a mandatory funded pension system is introduced into the
economy, the result will be increased financial assets. However, as assets match liabilities,
gross debt will grow at the same time. It might not be debt held by the same sector but debt
will increase. If you focus only on gross debt and gross assets, you could easily conclude
that the introduction of a funded pensions system has weakened the financial stability but
this conclusion is not true if society is ageing. Denmark is a small open economy, thus
assets and liabilities do not have to match within the country. However, as Denmark has
been running continual surpluses on the current account since the beginning of the 1990s
and thus during the period of rapid growth in gross assets and liabilities, Danes in general
have not been saving too little – arguably, quite the opposite.
Along with the Netherlands, Denmark has been a front-runner globally in building up a
funded pension system. Households in Denmark and the Netherlands have, as a
consequence, gross debt significantly above the global average but if we include financial
assets in the equation, the conclusion changes. The Netherlands and Denmark have net
financial assets close to the global average and the ageing problems are addressed unlike
in many other economies globally, economies that are only now starting to build up a
funded pension system. These countries are very likely to build up assets as well as
liabilities over the forthcoming decades. We note that Denmark’s nominal GDP growth
since 1987 has on average been around 3.7%, while at the same time net savings have been
on average 7.5% of GDP. If a country is saving 2 times more than the rate at which its
economy is growing, this is bound to imply a rising gross debt to GDP ratio.
Key figures for Danish households’ assets and liabilities
Financial assets
of which pension
2013
% of GDP % of disp. inc.
265
568
131
279
2014
% of GDP % of disp. inc.
280
599
143
304
2015
% of GDP % of disp. inc.
287
606
142
300
Value of houses
147
314
148
316
153
322
Financial liabilities
of which mortgage loans
137
93
293
198
135
91
288
194
131
88
277
185
Net financial assets
Net assets including houses
128
276
275
589
145
293
310
626
156
309
329
651
Source: Statistics Denmark and Danmarks Nationalbank
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As savings are mostly mandatory, any reduction in household gross debt will have to come
from lower spending. In principle, that could be offset by higher government borrowing or
borrowing by business in order to sustain domestic demand, but the government’s structural
budget deficit is already at 0.5% of potential GDP, which is the largest deficit allowed
under the budget act in normal circumstances. Corporate borrowing remain constrained by
low investment activity, as we also see in other developed economies following the
financial crisis. Furthermore, it is not obvious that a shift in indebtedness from households
to government and businesses would improve financial stability. In reality, reductions in
household spending are likely to boost the current account surplus, which is already one of
the world’s largest and clearly above the threshold level in the EU macroeconomic
imbalance procedure.
Debt in itself does not have to be a problem if it is offset by even larger savings. Thus, the
discussions of a high leverage ratio have to take into account the underlying reason for the
significant debt, which in the Danish case is linked to the build-up of a funded pension
system. Ignoring the fundamental drivers of savings and debt creation may lead to solutions
that could impair rather than strengthen financial stability.
High gross debt in Denmark – but not a new phenomenon
Danish households’ gross debt is one of the highest in the world, in proportion to the size of
the economy. Measured in percent of nominal GDP, gross debt is 133%; if measured by
percent of disposable income; gross debt is 261%. This is a very high level compared with
other countries – only the Netherlands has comparable debt levels.
The relatively high gross debt level in comparison with other countries is not a new
phenomenon. For many years, Danish households have had a higher debt level than we see
in other countries. According to a study by the Danish central bank in 2011, household debt
as a percent of disposable income was 140% in 1980 in Denmark – in all other countries
included in the study the level was below 100% of disposable income. The Danish
household sector’s gross debt level was approximately twice as high as the gross debt level
in comparable countries in 1980. Gross debt in most western economies has increased since
then. Danish gross debt now amounts to 261% of disposable income, which is still
approximately twice as much as the average level in countries otherwise similar to
Denmark. Thus, having high debt in the household sector is far from a new thing in the
Danish economy.
Gross debt in the household sector as a % of GDP, 2015
160 % of GDP
High debt is not a new phenomenon (% of disposable income)
% of GDP 160
Household debt % of net disposable income
140
140
300
120
120
250
100
100
80
80
60
60
40
40
20
20
0
Source: Eurostat
0
300
1995
2015
200
150
150
100
100
50
50
0
0
Source: OECD
There is no doubt that the gross debt level of Danish households is high, but a direct
comparison can exaggerate the difference. Debt levels relative to disposable income are
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250
200
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inflated by the fact that taxes are high in Denmark. But taxes also pay for essential expenses
on health, education, child care, and so on, that households in other countries have to pay
for out of their disposable cash income. Adjusting for that lowers the debt numbers relative
to income not only for Denmark, but also the other Nordic welfare states and the
Netherlands. In addition, disposable income in the Danish national accounts is calculated
net of mandatory pension savings.
The household sector includes personally owned businesses, including agriculture, which
has historically been organised as personally owned in Denmark. Household debt is usually
measured as the total liabilities of the household sector. Of these, about 1/6 are not debt per
se to banks or mortgage lenders, but trade credits and other non-paid liabilities. Of the debt
to financial institutions, about ¼ is not held by wage earners, pensioners, etc., as defined
by Danmarks Nationalbank. Thus, ordinary loans to ordinary households amount to 87%
of GDP, and not the 131% that are the total liabilities of the household sector.
Choice of income measure makes a difference
Some households are also businesses
Household debt % of disposable income, 2015
300
250
200
300
Cash income
Incl transfers in kind
250
200
150
150
100
100
50
0
*2014. Source: OECD.
50
0
”NA” is national accounts definition. ”MFI” is loans from monetary and financial
institutions. Source: Danmarks Nationalbank, Danmarks Statistik
The high debt level is a consequence of a combination of different factors. The most
important factor is the unique system of mortgage financing. For more than 200 years, the
Danish mortgage system has allowed Danes to buy homes with relatively little equity. The
system has worked well, keeping borrowing rates low and access to loans open even at the
height of the crisis in 2008. More than 75% of the household sector’s debt is financed
through the mortgage system. Loans given through the mortgage system are all based on
the security of a house; thus, household debt in Denmark is very much linked to buying
property. It is worth noting that there have been no losses for investors in the mortgage
system in the more than 200 years it has existed, indicating that this is a very well
functioning system despite the high gross debt level.
A very comprehensive and economically sustainable welfare state is also an important
factor behind the substantial gross debt in the household sector. The welfare state reduces
the need for private savings, as all Danes receive a basic pension after retiring and
healthcare is free. In addition to this, it is not necessary to save for children’s education and
so on.
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Although debt has always been high, it has increased significantly in recent decades. The
increase should be viewed in light of several factors but most important is that over this
period the Danish pension system has gone from being solely a pay-as-you-go system
financed by tax revenues to being a combination of a pay-as-you-go and a privately funded
pension system. The structural shift took place in the late 1980s, when after a period of
considerable pressure on the balance of payments Denmark implemented a number of
economic reforms aimed at stronger economic stability through higher savings. Today,
Danes typically pay between 10% and 15% of current gross income into a personal, but
forced, retirement account. The significant retirement payment is not voluntary and it
applies to all employees regardless of age. This means that both graduates in their early 20s
and experienced workers in their early 60s have to pay at least the same share of their gross
income into a pension scheme.
The significant ongoing pension savings have resulted in a very significant boost in the
assets held by the household sector but, at the same time, have led to higher indebtedness.
It is natural that some younger families, in particular, are compensating for the high savings
forced by higher debt financing of, for instance, their house. Thus, the increase in household
debt since the late 1980s has gone hand in hand with an increase in household assets.
A frequently used explanation for the significant gross debt in the household sector is the
introduction of interest-only loans. Interest-only loans were introduced in late 2003 and this
new type of loan boosted the housing market at a time when interest rates fell. Higher house
prices made it possible for households to obtain additional cheap loans. However, as can
be seen from the chart below, net financial assets actually increased over this period. It was
already cheap and easy to take up additional debt when house prices increased before
interest-only loans were introduced. Thus, if interest-only loans have had an effect on debt
levels, it is more likely to have been through higher house prices.
Assets and liabilities have increased substantially
Net assets have reached the highest level ever
350 % of GDP
180 % of GDP
% of GDP 350
300
300
250
250
% of GDP 180
160
160
140
140
120
120
100
100
200
200
150
150
80
80
100
100
60
60
50
40
40
20
20
50
0
0
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Gross financial assets
Gross financial liabilities
0
0
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Net financial assets
Note: There was a data breach in the financial accounts in 2013.
Source: Statistics Denmark and Danmarks Nationalbank
Note: There was a data breach in the financial accounts in 2013.
Source: Statistics Denmark and Danmarks Nationalbank
If we examine the gross assets held by the household sector, they make up 294% of nominal
GDP. Assets have increased significantly over the past 18 years. In 1999, financial assets
were 174% of nominal GDP.
If instead of looking at gross debt and gross assets we focus on net assets, we can see that
households’ net financial assets, which do not include the value of, for example, housing
or cars, represented 163% of nominal GDP in Q2 2016. In other words, we are looking at
quite substantial net assets in the household sector in Denmark.
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Denmark does not differ significantly from the countries we normally compare it to when
we focus on the size of net financial assets. The Euro area average for net financial assets
in the household sector was 144% of GDP in 2015 – the Danish level was 156% of GDP
in 2015. Since then the level of net assets has increased due to increased savings and a
favourable financial environment. Also, Danes have a sustainable public sector unlike
many other countries in Europe; thus, there is not a significant tax bill waiting for the Danes
in the future.
Financial net assets are quite volatile over time; nonetheless, net assets have increased
considerably in the period since 1999. In 1999, net financial assets were 84% of GDP. In
2016, net financial assets had almost doubled to 163% of GDP, the highest level ever.
Net financial assets close to European average
Households, net financial assets in % of GDP 2015
Current account surplus and net assets abroad
10 % of GDP
% of GDP 50
8
40
6
30
4
20
2
10
100
0
0
50
-2
-10
0
-4
-20
-6
-30
250
200
Belgium
Netherlands
Italy
Malta
Sweden
Denmark
France
Euro area
Austria
Portugal
Germany
Spain
Cyprus
Bulgaria
Hungary
Croatia
Latvia
Ireland
Greece
Czech Republic
Luxembourg
Slovenia
Estonia
Finland
Poland
Lithuania
Romania
Slovakia
Norway
150
Source: Eurostat
-8
Current account (lhs)
-10
Net assets abroad (rhs)
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Source: Statistics Denmark
That net assets held by the household sector do not differ from the net assets in similar
countries illustrates that the high gross debt cannot be attributed to Danish households
living beyond their means. It is a consequence of a different composition of assets and
liabilities.
That Denmark does not have a savings problem is also demonstrated by the consistent and
substantial current account surplus held by the country since the early 1990s. The balance
of payments reflects the relationship between national savings and investments. Denmark
currently has a surplus of over 7% of GDP. In that respect, Denmark is closer to having too
much rather than too little savings. Many years of current account surpluses has ensured
that Denmark’s foreign assets exceed Danish foreign debt. Denmark has net assets abroad
equivalent to 52% of annual GDP.
Strengths and weaknesses of having significant assets and
liabilities
That the household sector’s net assets are considerable and Denmark clearly does not have
a national savings problem does not mean that there cannot be advantages and
disadvantages of having such large balances.
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-50
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First, and most importantly, having a cheap and easily accessible mortgage system is a
strength for an economy. A well-functioning financial system with strong liquidity makes
it possible for households to optimise their consumption over time. Significant pension
savings also ensure that households have sufficient savings to ensure a relatively high living
standard after retiring. In addition to this, the structure of the pension system has played a
very important role in ensuring that, according to independent analysts’ projections, the
Danish welfare state is economically sustainable, even though Denmark will undergo an
aging of the population over coming decades. The significant retirement savings contain an
element of deferred tax, which helps to ensure revenue to the Treasury when the number
of Danes drawing a pension increases. In addition, private pension savings will reduce the
cost of publicly financed benefits and pensions in the future, as many of them are means
tested. Thus, private pension savings will reduce public expenditure and increase public
revenues in the future.
A strength that is often looked on as a weakness is that the combination of high assets and
liabilities ensures that interest rates changes affect the economy directly. This is a clear
advantage if the interest rate is in line with the business cycle. As the business cycle in
Denmark over the past 30 years has been more or less in line with the business cycle in the
eurozone (the currency anchor), the significant assets and liabilities ensure that monetary
policy works more efficiently.
The Danish business cycle is in line with the European one
Danish interest rates close to European anchor
Source: Macrobond Financial
Source: Macrobond Financial
This said, the significant interest rate sensitivity is also the main risk from the major assets
and liabilities. If interest rate changes are not attuned to the economic situation in Denmark,
there is a risk that Danish households will be hit by an economic shock they may find
difficult to handle. But the problem is manageable, from the households’ point of view.
Below we present a series of calculations made by the Danish central bank. The calculations
show that the vast majority of Danish households would be able to handle even significant
increases in interest rates.
Another disadvantage of the significant assets and liabilities is that the assets are to some
extent illiquid. This means that if households are hit by an economic shock, they may have
difficulty in adapting their domestic economy.
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Assets are significant but often illiquid
Since the late 1980s, a new system of labour market pensions has been built up and
widened, so that it now covers nearly all parts of the labour market with the self-employed
the major exception. Payments to labour market pensions are non-voluntary but individual.
Typically, employed Danes save between 10% and 15% of their gross income. The money
is deducted automatically from their monthly salary, normally before taxes are paid.
Pension payouts at retirement are typically taxed. Compared with other types of savings,
pension returns are taxed at a lower tax level. Partly for tax reasons, a lot of Danes have
chosen not only to have a mandatory labour market pension saving but also to have an
additional pension saving. Voluntary pension contributions are typically made by
households that are nearer to retirement. Historically, there has been a (perceived) tax
incentive to save on pensions through lower tax on pay out compared with on pay in. That
incentive often weakens or disappears when adjusted for the effect of individual saving on
means-tested public benefits to pensioners, a fact that has attracted a lot of attention in
recent years. Thus, the tax incentive is primarily through the lower taxation on returns,
which are taxed at 15.3% instead of up to 42%. Annual payments to pension accounts
amount to 12-15% of disposable income in the household sector or 6-7% of GDP – in 1985,
pension savings were only 2.5% of GDP; thus, pension savings have almost tripled.
The build-up of pension funds has led to a sharp increase in household savings and gross
assets are more than twice as large as gross debt. Of the household sector’s financial assets,
50% are pension funds. Thus, 50% of assets are fully liquid. This is somewhat lower than
in the rest of Europe, were many pensions systems remain unfunded – arguably, a hidden
liability for households there.
Pensions funds are an important part of assets
350 % of GDP
Liquid financial assets are also in positive territory
% of GDP 350
40
% of GDP 40
300
300
30
30
250
250
20
20
200
200
10
10
150
150
100
100
% of GDP
0
50
0
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Gross financial assets
0
-10
-10
-20
-20
50
-30
-30
0
-40
-40
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Pension assets
Note: Data breach in the financial accounts in 2013. Households only.
Source: Danmarks Nationalbank
Net liquid financial assets
Note: Data breach in the financial accounts in 2013. Households only.
Source: Danmarks Nationalbank
Even though pensions are not fully liquid, some pensions can actually be paid out before
retirement with a tax penalty. The penalty is 60% instead of the normal tax that would have
been paid at pay out, which is up to 52%. Labour market pensions can typically not be
withdrawn before retirement.
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Pension savings consist partly of deferred taxes. On average, deferred taxes amount to
something like 40% of the pension saving. That a part of pensions is deferred taxes reduces
households’ actual savings but, on the other hand, it is an important element in securing the
long-term sustainability of the Danish welfare state and the significant future tax payments
act to secure public pensions in the future. Excluding deferred taxes, net financial assets
amount to just above 100% of nominal GDP. Thus, even after taking taxes into account,
Danish households still have a robust savings position.
If we exclude pension savings from households’ assets, net assets are still positive but the
level is close to zero. Fully liquid net financial assets amount to 15% of GDP.
Net assets including houses are high and increasing
In the calculations so far, we have looked only at financial assets but as a large part of debt is
linked directly to the value of houses, it is worth looking at the data including the value of
homes owned by the household sector. According to Realkredit Danmark’s calculations, the
value of homes is 156% of GDP, excluding rental and corporative housing. If we add the value
of homes to the financial assets, it becomes quite clear that Danish households have a strong
asset-liability position. Net assets including houses add up to 320% of GDP and has been
increasing since 2009. It has now hit the level reached just before the financial crisis hit the
Danish economy – this is despite house prices being below the level before the crisis.
The value of non-financial assets is also significant
% of GDP
Significant net assets when houses are included
% of GDP
% of GDP 350
% of GDP 200
350
190
190
330
330
180
180
310
310
170
170
290
290
160
160
270
270
150
150
250
250
140
140
230
230
130
130
210
210
120
190
110
170
100
150
200
120
Houses owned by the household sector
110
100
98
00
02
04
06
08
10
12
14
16
190
170
Net assets including houses
150
00
02
04
06
08
10
12
14
Note: Data breach in the financial accounts in 2013. Households only.
Source: Realkredit Danmark and Statistics Denmark
Source: Realkredit Danmark and Danmarks Nationalbank
In the wake of the financial crisis, the Danish housing market also underwent a crisis. From the
peak in 2007 to the bottom in early 2012, house prices fell by an average of 20.1%. While the
market turned several years ago and prices have been rising since the beginning of 2012, prices
remain 5.3% below the pre-crisis level on a country average. It is primarily in the cities, and in
particular, the Copenhagen area, we have seen the big price increases. Apartments are primarily
located in the cities and this is a large part of the reason for the significant increases we have
seen in apartment prices the last couple of years. Apartment prices fell by 30% during the crisis.
However, they have risen by 54% since the bottom in 2009 and are currently 8% above precrisis levels.
It is worth noting that the financial crisis in combination with the Danish crisis never at any
time pushed total net assets to fall below 230% of GDP. Thus, even in an extremely stressed
economic and financial situation, Danish households had a strong wealth situation due to
the significant savings especially in pension funds.
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House prices are increasing again
The population is set to increase
160 Index 2016=100
Index 2016=100 160
140
140
120
120
100
100
80
20-64 years
Older than 65 years
Total population
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
2052
2054
2056
2058
2060
60
0-19 years
Source: Statistics Denmark
Source: Statistics Denmark
In the long run, house prices should be determined by the supply side; that said, it also plays
an important role in how demand is likely to develop. Demand is influenced by many factors
but demographics play a very important role. Statistics Denmark expects an increase in the
Danish population of 760,000 persons or 13.6% by 2060. It does not expect population growth
to be evenly distributed across age groups, seeing a slight increase in the number of children
and young people of 9%. The projection shows the number of inhabitants of traditional
working age to increase by 4%, while the number of people over 65 will increase by 5%.
Although population growth is not uniform, it calls for the population to increase in all age
groups and, in our view, demographics will not be a drag on house prices. Instead, population
growth is likely to lift house prices slightly.
A risk to house prices, especially in those areas where they have risen the most recently, could
be higher interest rates. It is unlikely to be a major risk for house prices in general, as higher
interest rates will reflect a stronger European economy and higher inflation, which are positive
for house prices.
Relatively little damage during the crisis
That households’ economic situation is not as fragile as gross debt alone might suggest is
illustrated by looking at the actual development in the period of the global financial crisis
and the Danish housing market crisis. Although the decline in house prices left many
homeowners with a home worth less than their mortgage, it did not cause a large increase
in foreclosures and forced sales of homes, or in mortgage payment arrears – even though
Denmark witnessed a relatively sharp fall in employment. Loan losses at the three major
mortgage lenders were below 0.25%. Thus, we have been stress testing the household
sector in a real-life scenario and no major problems emerged. Since the crisis peaked in
2010/11, households have increased savings significantly and the risk of significant
problems related to the household sector seems to us to be even smaller now.
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The number of forced sales has stayed relatively low
Arrears at the mortgage banks
Quarterly forced sales 6000
6000 Quarterly forced sales
Development land
5000
5000
Combined commercial and private
property
4000
Multifamily housing
4000
Second homes
3000
3000
Owner-occupied apartments
2000
2000
Single family homes
Agricultural property
1000
1000
0
0
81
86
91
96
01
06
Source: Statistics Denmark
11
16
Source: Association of Danish Mortgage Banks
Interest sensitivity has increased
Danish households have become more interest-rate sensitive over the past decade due to a
combination of two factors. The first factor is the above-mentioned build-up of assets and
liabilities. Adding to this is that Danes often have variable rate mortgages. Loans with variable
interest rate were introduced in the Danish mortgage system in 1996 and the majority of loans
have a variable interest rate today. Prior to 1996, the standard loan had a fixed rate for 30 years
and this is still the standard by which the creditworthiness of homebuyers is judged. According
to a study published by the Danish central bank, a 1pp increase in short-term rates today
decreases households’ disposable income by close to 0.7%.
Before 2000, higher short-term rates actually increased household net income, as they affected
few mortgages and households were (and are) net depositors in banks. Recently interest
sensitivity has fallen a bit again, as the share of mortgages with annual readjustment of rates
has declined by an estimated 7.8pp in two years to 29.1% of the total mortgages, mostly
replaced by loans where the rate is fixed for three or five years.
Falling interest rates since the onset of the crisis have served to reduce the interest burden
on households significantly despite the high level of debt to a level lower than in 2003, the
starting point of the time series. As of 2016, it was an estimated 4.4% of disposable income
after tax. Almost all interest expenditure is tax deductible at a value that effectively reduces
the cost by one-third. The value of the deduction is lower (falling to 25.5% by 2019) for
interest expenditure beyond DKK50,000, or DKK100,000 for a married couple. The
DKK50,000/100,000 limit is not indexed, so eventually inflation will slowly cause the tax
deductibility to be lowered.
Danish interest rates closely follow euro rates because of the fixed exchange rate policy
and so the outlook is for an eventual slow and modest increase in short-term rates, which
should not matter too much for household disposable income. The risk to both this and
house prices is that pressure against the krone forces the central bank to raise rates sharply.
However, that is very far from happening. Due to the large current account surplus and high
creditworthiness of both government and mortgage bonds, there has been a significant
appreciation pressure on the Danish krone, leading the central bank to maintain a lower
policy interest rate than in euro.
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Debt is held by households with high income
When looking at debt in the household sector, it is worth noting that debt is concentrated
among the households with the highest incomes. The main reason for the high debt level
among households in the top income brackets is that these households spend a large share
of their income on housing. The high incomes give these families more economic flexibility
and the distribution of the debt is there for reassuring with regard to financial stability.
Family gross debt ratio across income deciles 2010
700 % after-tax income
For every income decile, there is a boxplot illustrating the
distribution of the gross debt ratio within a given income
decile. The chart illustrates that the gross debt ratio
increases with income. In other words, those who lend
money are also those with the highest incomes.
90. percentile
75. percentile
Median
25. percentile
10. percentile
600
500
400
300
200
100
0
1
2
3
4
5
6
7
Income decile
8
9
10
For example, the 10th percentile for the 10th income decile
is 42%. This means that 10% of the families in the 10th
income decile have a gross debt ratio below or equal to
42%. The median (50th percentile) for the 10th income
decile is 272%, implying that 50% of the families in the
10th income decile have a gross debt ratio below or equal
to 272%. The 90% percentile of the 10th income decile
shows that 10% of the families in the 10th income decile
have a debt ratio above 538%.
Source: Danmarks Nationalbank
Households are financially robust
Danmarks Nationalbank has made an analysis of households’ financial robustness based on
micro data from 2010 published in its Monetary Review 2012, 4th quarter. The analysis
concludes that most households are still able to meet their debt obligations on mortgage loans
even following different shocks if they are willing to tighten their belts and have the same
costs of living as low-income households. The analysis revolves around a so-called ‘financial
margin’, which is the difference between disposable income and living expenses (including
redemptions on mortgage loans) (see the table to the right for the exact definition). The
financial margin can be interpreted as a measure of households’ financial scope. A negative
financial margin means that a household’s income does not cover its costs of living including
redemptions and vice versa. The vast majority of households have a positive financial margin
if they reduce their expenses to maintain a certain standard of living similar to low-income
households. Taking the possibility to sell liquid assets into account, only 1% of households
have a negative financial margin.
Breakdown of debt by financial margin
Financial margin
Mortgage debt
(1000 DKK)
<0
0-75
75-150
150-250
> 250
SUM
Source: Danmarks Nationalbank
Disposable income
- redemptions on mortgage loans
- housing occupancy expenses
- other fixed expenses
- a sufficient disposable amount
= financial margin
Source: Danmarks Nationalbank
Breakdown of debt by financial margin after 5pp interest rate
shock
Bank debt
Other debt
(DKK bn)
35
102
165
296
573
1171
Definition of financial margin
29
75
93
118
195
510
Financial margin
Mortgage debt
(1000 DKK)
31
78
96
122
202
529
<0
0-75
75-150
150-250
> 250
SUM
Bank debt
Other debt
(DKK bn)
75
130
195
318
453
1171
63
87
99
117
144
510
Source: Danmarks Nationalbank
Interestingly, the vast majority of households can withstand higher interest rates, as only
2% more households would have a negative financial margin following an interest rate
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69
89
102
121
148
529
Research Denmark
shock of 5pp lasting one year if they reduced expenses. Not surprisingly, this shock would
mostly affect households with variable-rate mortgage loans. It is important to note that the
shock would hit households with variable-rate mortgage loans differently depending on the
time between the interest rate adjustments, so interest rate shocks would not affect the
Danish economy at full power on impact. Households with a longer time to the next interest
rate adjustment can make the necessary changes to meet higher interest rates on their
mortgage debt in advance. Note that the study is based on 2010 data and that interest rates
are lower today than in 2010. Therefore, it is likely that households are more robust to a
5pp interest rate shock today than in 2010.
The analysis also finds that households are quite robust with respect to temporary
unemployment of three- and six-months duration for the household’s principal earner. The
reason is that most households are able to sell liquid assets in order to offset temporary
unemployment.
In a follow-up study, Danmarks Nationalbank concludes that households’ determination to
avoid arrears on mortgage loans is strong. Borrowers are personally liable for their mortgage
debt, which gives them a large incentive to avoid arrears. The analysis finds that the number
of households with mortgage arrears remains low even following two different stress scenarios.
Overall, the analysis concludes that Danish households are robust with respect to the
different shocks that can affect a household’s ability to meet its obligations as long as it is
willing to make some sacrifices by living to a tighter budget and selling some of its liquid
assets. The incentive structure in the credit market is such that mortgage arrears are rare.
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Disclosures
This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’).
The authors of this research report are Las Olsen (Chief Economist), Bjørn Tangaa Sillemann (Analyst) and Mark
Thybo Naur (Assistant Analyst).
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