Is Danish housing slump ending as excesses squeezed out?

Bloomberg reports that S&P sees the Danish housing slump ending as the gap between what people can afford to pay for a house based on their earnings narrows with the actual cost of housing.

Regular readers know that based on the experience of Ireland, the decline in house prices does not stop simply because people can now afford to buy them again.  The decline in house prices stops when people think that the price of houses is not going to decline much further.

Denmark’s housing slump is nearing its end as the excesses of the nation’s property boom fade and the gap between what people earn and the price of a home narrows, Standard & Poor’s analyst Per Tornqvist said. 

“We think the bulk of the adjustment process, of needing to sort out what had obviously been excesses, that this will potentially be completed by the end of this year,” Tornqvist, who is based in Stockholm, said in an Aug. 31 phone interview. “So we are close to the end of the adjustment process.” 

Home prices have plunged about 25 percent since a 2007 peak and declines this year will average 3.5 percent, the government estimates. 

The housing crisis, combined with rising job losses, has suffocated demand and pushed the economy to the brink of its second recession in less than a year. Any recovery in Denmark’s housing market is likely to be gradual, S&P estimates. 

“There are some signs of improvement, though we do not expect a rapid turnaround,” Tornqvist said. “The problem with a high private debt burden is that it is a very long-term trend to change the leverage in society. You’re almost looking at a multi-decade process, certainly a process that can last a decade.”...

The only way to accelerate this process it to require the banks to absorb the losses on the excess debt in the financial system.

Danes bear the highest household debt burdens in the world, relative to income. 

Indebtedness reached 322 percent of disposable incomes in 2010, S&P estimates. 

“It’s come down very slightly since then but it’s obviously not a ratio that changes very fast,” Tornqvist said.

AAA rated Denmark has relied on its haven status, supported by a government debt level that’s less than half the euro-zone average and a current account surplus, to keep its borrowing costs low. The country pays less than Germany to borrow for 10 years and has charged investors to hold its two-year debt through most of July and August.

A capital influx into Denmark has also forced the central bank, which pegs the krone to the euro, to cut its benchmark rates to record lows and bring its deposit rate to an unprecedented minus 0.2 percent. 

Even rates on short-term Danish mortgage bonds may sink below zero, according to Rune Brinch Kristensen, chief analyst at Nykredit A/S, the country’s largest mortgage lender and Europe’s biggest issuer of covered bonds backed by home loans. 

While S&P’s main scenario is that monetary policy will “continue as it is in the medium term,” Danes are at risk of depending too much on record-low borrowing costs to sustain their debt loads, Tornqvist said. 

“It’s a key weakness in Denmark that the economy is reliant on low interest rates,” he said. “Should interest rates rise sharply, that is potentially the most painful economic shock to Denmark.”