Denmark’s central financial institution is clearly in a bitter temper, maybe tetchy after the nation’s premature World Cup exit this week. Fretting concerning the results of inflation on rates of interest, it warned on Thursday that in a extreme recession home costs would possibly fall by nearly a 3rd, testing Danish banks’ capital buffers.
While Danish home costs boomed within the run-up to 2008, this time round it’s the rising actual property dangers for its Nordic friends that fear the central financial institution.
Unlike Sweden and Norway, Danish financial coverage follows that of the European Central Bank as a result of a longstanding foreign money peg. Despite years of ultra-low ECB rates of interest, Danish property values have exhibited shocking restraint by comparability.
House costs in Denmark have solely risen by a few quarter since 2008. In each Sweden and Norway they’ve roughly doubled. This yr the pattern has reversed for all three. However, in Sweden, dwelling costs have dropped 13 per cent simply since March.
For the Danes, tighter lending requirements and a decrease proportion of floating charge mortgages have helped put a lid on hypothesis. At chief Danske Bank, nonetheless recovering from its 2018 money-laundering scandal, common loan-to-value on its home mortgage e-book is beneath 50 per cent. On its Swedish e-book that is nearer to 60 per cent.
Commercial actual property, too, presents important threat throughout the border. Landlords in Sweden overextended themselves with debt-fuelled expansions. As charges climb and valuations drop, count on asset gross sales and deleveraging to observe.
Danske might keep away from the worst with its Swedish business publicity equal to only 3 per cent of whole, says Citi. Compare that with 12 per cent at Swedish lenders Handelsbank and Swedbank. Danske has its personal challenges. It has extra credit score impaired (stage 3) loans in sectors susceptible to an financial slowdown, resembling accommodations and leisure, than different Nordic banks.
Yet given Sweden’s present issues, the Danish central financial institution is correct to blow the whistle early on property dangers.
