In line with the trend in most of Denmark's neighbouring countries and other advanced economies, the value of the assets held by Danish households – their homes, equities, pension savings, bank deposits, etc. – has risen by more than their debt over the last 15-20 years. The difference between the value of household assets and debt is known as net wealth. In an international comparison, Danish households' net wealth relative to disposable income is at an average level. But Danish households differ from those in other countries in that they have very large balance sheets, i.e. large wealth as well as large debt. Particularly the high level of household debt has attracted considerable attention, nationally and internationally.
Why is household debt higher in Denmark than in other countries?
The main reason why households raise debt is that they buy homes or consumer durables, such as cars. Hence, household debt cannot be viewed in isolation from household wealth.
A well-developed financial system
Households' access to mortgage their wealth varies considerably across countries. Compared with other countries, it is relatively easy and inexpensive to borrow against wealth in Denmark. One of the reasons is that Denmark has a very well-developed financial system. For example, the mortgage-credit system allows homeowners to raise inexpensive loans using the home as collateral. The development of new loan types, such as adjustable-rate and deferred-amortisation loans, has also played a role, as the introduction of these loan types has contributed to increasing house prices and thereby also debt.
Large pension wealth
Danish households differ from households in most other countries in that they have very large pension wealth. This means that many Danes can look forward to relatively high income after retirement, which reduces their need to be debt-free when they retire.
Interaction with public sector and firms
Finally, since there is cross-sector interaction between savings, wealth and debt, the household sector should not be viewed in isolation from the rest of the economy. Denmark has relatively low public debt compared with most other countries. Therefore Denmark can afford an extensive social safety net and a high level of public service. Both reduce the risk that households are unable to service their loans. If all sectors – households, firms and the public sector – are taken as one, Denmark has considerable net foreign assets.
Which households have debt?
The debt of Danish households is to a large extent concentrated among the households with the highest incomes. This is also the group where the proportion of households with high debt-to-income ratios is largest. As stated above, the main reason for a household to raise debt is the purchase of a home. So one of the reasons 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.
Does high debt make Danish households vulnerable?
The larger the debt is, the higher the expenses will be for interest and principal payments. Consequently, a large debt can put a strain on household finances, especially if the household is hit by unpredicted events such as unemployment or illness. The combination of higher debt and increased use of adjustable-rate loans also means that household finances have become more sensitive to fluctuations in interest rates than previously. Analyses by Danmarks Nationalbank and others show that the vast majority of Danish households have robust finances and are resilient to an interest-rate hike or a prolonged period of unemployment. Most families have sufficient scope in their budgets to be able to handle e.g. rising interest expenses at their current income levels. Others have savings that they can eat into if their incomes are not quite sufficient, even for longer periods. The share of households with robust finances is particularly high among those with mortgage debt. It is relevant to focus on this group, as mortgage debt accounts for the lion's share of household debt. The ability and willingness of households to service their mortgage loans are very robust, and even among families with squeezed finances only very few fall into arrears. At the macroeconomic level, this indicates that even a severe setback in the Danish economy would lead to only a very limited increase in the number of households that do not service their mortgage debt. One of the reasons is that mortgage debt is typically the last debt item on which a family chooses to default. For other loans, including bank loans, the number of households in arrears will presumably rise much more if the Danish economy is hit by a severe setback.
Is the debt level of households too high?
Household debt may have an impact on the real economy, e.g. output and employment, via two main channels. Firstly, a large debt could mean that it is difficult for households to repay their debt, so that banks and mortgage banks incur losses. This may reduce financial stability and, in the worst case, lead to a financial crisis. Secondly, a large debt means that even small changes in interest-rate levels will have a fairly strong impact on household disposable income, i.e. income after tax and interest payments. This may lead to larger fluctuations in private consumption and reduce macroeconomic stability.
No serious threat to financial stability
Danmarks Nationalbank's analyses show that household debt is not a serious threat to financial stability. This is particularly true in relation to mortgage banks. The vast majority of households with high debt levels are financially robust, and as far as mortgage debt is concerned, the repayment ability of households has proved to be robust. But (non-mortgage) banks are likely to see a stronger increase in losses if the Danish economy is hit by a severe setback. A special issue relates to the use of mortgage bonds with short maturities for financing the households' adjustable-rate loans. Mortgage loans of this type have become very popular with households and therefore the volume of mortgage bonds to be sold every year has surged. Consequently, the mortgage banks' refinancing risk has increased.
For further information about Danmarks Nationalbank's most recent survey on financial stability in Denmark: Financial stability reports.
Increased interest-rate sensitivity may reduce macroeconomic stability
As a result of the high level of debt, of which a large share is at a variable rate of interest, changes in interest rates will have a stronger impact on disposable income than they did 10-20 years ago. Changes in income are of major significance to consumption, so private consumption has also become more sensitive to interest rates, which may reduce macroeconomic stability in certain situations. This may be the case if, say, interest rates rise at a time of high unemployment and weak growth. However, in normal circumstances, increases in interest rates coincide with rising growth and employment.