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Investment Research — General Market Conditions

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 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.

13 February 2017

Research Denmark

Danish households are resilient

Chief Economist Las Olsen +45 45 12 85 36 laso@danskebank.dk

Economist Bjørn Tangaa Sillemann + 45 45 12 82 29 bjsi@danskebank.dk

Assistant analyst Mark Thybo Naur mnau@danskebank.dk

Selected readings from Danske Bank

Research Denmark: Large current

account surplus is here to stay

Follow us on Twitter :

@Danske_Research

Read more in Danske Bank’s recent

forecasts and publications

Nordic Outlook

Yield Forecast Update

FX Forecast Update

Weekly Focus

2 | 13 February 2017 www.danskeresearch.com

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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 ageing of the population, giving greater

economic security for households. In addition, housing wealth has increased substantially

despite the housing market crisis of the 2000s. Real house prices have increased by 90%

since the beginning of the 1980s. Moreover, property prices should 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-as-

you-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

Source: Statistics Denmark, Danmarks Nationalbank

% of GDP % of disp. inc. % of GDP % of disp. inc. % of GDP % of disp. inc.Financial assets 265 568 280 599 287 606of which pension 131 279 143 304 142 300

Value of houses 147 314 148 316 153 322

Financial liabilities 137 293 135 288 131 277of which mortgage loans 93 198 91 194 88 185

Net financial assets 128 275 145 310 156 329Net assets including houses 276 589 293 626 309 651

2013 2014 2015

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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 remains 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 High debt is not a new phenomenon (% of disposable income)

Source: Eurostat 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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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

*2014

Source: OECD.

Note: ‘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 system that

functions very well 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

Note: There was a data breach in the financial accounts in 2013.

Source: Statistics Denmark, Danmarks Nationalbank

Note: There was a data breach in the financial accounts in 2013.

Source: Statistics Denmark, 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 16. 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 166% 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 in 2012 Current account surplus and net assets abroad

Source: Eurostat 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 have 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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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

ageing 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 Liquid financial assets are also in positive territory

Note: Data breach in the financial accounts in 2013. Households only.

Source: Danmarks Nationalbank

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 cooperative 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 adds up to 320% of GDP and has been

increasing since 2009. It has now attained 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 Significant net assets when houses are included

Source: Realkredit Danmark and Statistics Denmark Note: Data breach in the financial accounts in 2013. Households only.

Source: Realkredit Danmark, 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, that 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 pre-crisis levels.

It is worth noting that the financial crisis in combination with the Danish housing 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

Source: Statistics Denmark Source: Statistics Denmark

In the long run, house prices should be determined by the supply side; that said, they also play

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 increasing by 4%, while the number of people over 65 will increase by 5%.

Although population growth is not uniform, it shows the population increasing 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 actual developments 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 stress tested 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

Source: Statistics Denmark 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.

0

1000

2000

3000

4000

5000

6000

0

1000

2000

3000

4000

5000

6000

81 86 91 96 01 06 11 16

Development land

Combined commercial and privatepropertyMultifamily housing

Second homes

Owner-occupied apartments

Single family homes

Agricultural property

Quarterly forced sales Quarterly forced sales

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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 therefore reassuring with regard to financial stability.

Family gross debt ratio across income deciles 2010

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. 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 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

Breakdown of debt by financial margin after 5pp interest rate

shock

Source: Danmarks Nationalbank 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

0

100

200

300

400

500

600

700

1 2 3 4 5 6 7 8 9 10

Income decile

% after-tax income

90. percentile

75. percentile

Median

25. percentile

10. percentile

Financial margin Mortgage debt Bank debt Other debt(1000 DKK)

< 0 35 29 310-75 102 75 78

75-150 165 93 96150-250 296 118 122

> 250 573 195 202SUM 1171 510 529

(DKK bn)

Financial margin Mortgage debt Bank debt Other debt(1000 DKK)

< 0 75 63 690-75 130 87 8975-150 195 99 102150-250 318 117 121> 250 453 144 148

SUM 1171 510 529

(DKK bn)

Definition of financial margin

Source: Danmarks Nationalbank

Disposable income - redemptions on mortgage loans - housing occupancy expenses - other fixed expenses - a sufficient disposable amount= financial margin

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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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