Research Denmark Danish households are resilient

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1 Investment Research General Market Conditions 1 November 214 Research Denmark Danish households are resilient Danish household 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 38% 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 157% of nominal GDP the highest level ever and twice as high as 15 years ago. Including the value of houses, the household sector s net assets amount to 37% of GDP. Pension savings are in general mandatory in Denmark. The mandatory savings contributions have been increased significantly since the late 198s 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 1-15% 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, 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 have chosen to organise their personal finances. 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 324% of annual disposable income or 157% of nominal GDP. This is the highest level ever and twice as high as 15 years ago. Chief Economist Steen Bocian stbo@danskebank.dk Senior Analyst Las Olsen laso@danskebank.dk Analyst Mikael Milhøj milh@danskebank.dk Important disclosures and certifications are contained from page 14 of this report.

2 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 198s, 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 recent housing market crisis. Real house prices have increased by 8% since the beginning of the 198s. 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-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 199s and thus during the period of rapid growth in gross assets and liabilities, Danes in general have not been saving too little it is actually rather the opposite that has been a challenge. Along with the Netherlands, Denmark has been a front-runner globally on 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 5.6% of GDP. If a country is saving 1.5 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 % of GDP % of disp. inc. % of GDP % of disp. inc. % of GDP % of disp. inc. Financial assets of which pension Value of houses Financial liabilities of which mortgage loans Net financial assets Net assets including houses Source: Statistics Denmark, SNA November 214

3 It is debatable whether all parts of the significant growth in assets and liabilities have been appropriate but this is not the same as concluding that reducing the gross debt is recommended. It could be argued that debt expansion was too rapid in the short period 25-8, which also had an impact on consumption as well as property prices. This created some temporary stress; however, an economy that shows no sign of reducing its propensity to save will not see a reduction in gross debt levels. As the savings are largely mandatory, a deleveraging would necessarily have to be done from the debt side only in the current institutional set-up for Denmark. Danish households cannot net-out assets and liabilities, as assets are in pension funds. If Danish households increase net savings, this will reduce growth over the coming years unless business spending or public spending increases. Business spending or investments are dependent on the global business cycle and, with a still weak recovery in Europe, it does not seem likely that business investments will grow significantly in the near term; thus, business is not likely to compensate for the increased savings in the household sector. The public sector cannot be expected to increase net spending either, as the public sector deficit is quite close to the 3% limit set out in the Maastricht agreement. Thus, the result of an increased savings rate in the household sector would be increased net saving for Denmark as a whole. This would lead to lower growth rates and possibly stagnation and an even higher current account surplus. A higher current account surplus would actually not be desirable. Denmark may have a savings problem but the problem is too high net savings, not too low. The current account surplus is already in breach of the EU rules. When we add it all up, it is not obvious that a deleveraging would strengthen financial stability. Low growth over a long period would naturally make many households more vulnerable. A more obvious solution would be to look at whether we can reduce vulnerability to, for example, large increases in interest rates. The work has already started and we have already seen borrowers modify their economic behaviour. However, debt itself does not have to be a problem if it is offset by even larger savings. Thus, the discussions on 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 141%; if measured by percent of disposable income; gross debt is 289%. 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 211, household debt as a percent of disposable income was 14% in 198 in Denmark in all other countries included in the study the level was below 1% 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 198. Gross debt in most western economies has increased since then. Danish gross debt now amounts to 289% 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. 3 1 November 214

4 Gross debt in the household sector as a % of GDP 212 High debt is not a new phenomenon (% of disposable income) Source: Eurostat, Danske Bank Source: Danmarks Nationalbank 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 2 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 28. 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 2 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. 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 198s, 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 1% 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 2s and experienced workers in their early 6s 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 198s has gone hand in hand with an increase in household assets. 4 1 November 214

5 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 23 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. Thus, the introduction of interest-only loans did not in itself increase net debt. 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 In % of GDP Gross financial assets Gross financial liabilities Net financial assets in % of GDP Source: Statistics Denmark, SNA95 Source: Statistics Denmark, SNA95 If we examine the gross assets held by the household sector, they make up 299% of nominal GDP. Assets have increased significantly over the past 15 years. In 1999, financial assets were approximately 18% 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 157% of nominal GDP in Q1 14. In other words, we are looking at quite substantial net assets in the household sector in Denmark. Denmark does not differ significantly from the countries we normally compare it to when we focus on the size of net financial assets. The European average for net financial assets in the household sector was 136% of GDP in 212 the Danish level was 114% of GDP in 212. Since then the level of net assets has increased due to increased savings and a favourable financial environment. Also, bear in mind that Danes have a sustainable public sector unlike many other countries in Europe; thus, there is not a significant unexpected 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 In 1999, net financial assets were 8% of GDP. In 214, net financial assets had doubled to 157% of GDP, the highest level ever. 5 1 November 214

6 Net financial assets close to European average in 212 Current account surplus and net assets abroad 25 2 Net financial assets in % of GDP in Source: Households, Source: Euro stat Source: Statistics Denmark That net assets held by the household sector do not differ from the net assets in similar countries clearly illustrates to us that the high gross debt cannot be attributed to Danish households living beyond their means. The high gross debt is, however, a consequence of Danish households having chosen a different composition for their personal finances than we see in other countries. 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 199s. The balance of payments reflects the relationship between national savings and investments. Denmark currently has a surplus of over 7% of GDP. Denmark is thus 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 38% of 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. 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 the Danish economy 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 should also help to reduce the drain on publicly financed benefits in the future as many public benefits are means tested. Thus, private pension savings will reduce public expenditure and increase public revenues in the future. 6 1 November 214

7 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 3 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 to 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. 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. However, there is still some give in many household budgets, which means that even though many of the assets of principle are illiquid, there is still scope for a lot of flexibility. Assets are significant but often illiquid Since the late 198s, 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 except the selfemployed. Payments to labour market pensions are non-voluntary but individual. Today almost all Danes save between 1% and 15% of their gross income. The money is deducted automatically from their monthly salary, typically 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. Because of the lower tax on pension return, 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 tax incentive to save on pensions through lower tax on payout compared with on pay in but that is generally not the case today. The tax incentive today is primarily through the lower taxation on returns. 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. 7 1 November 214

8 The build-up of pension funds has led to a sharp increase in household savings and gross assets are approximately twice as large as the gross debt. Of the household sector s financial assets, 48% are pension funds. Thus, 52% of assets are fully liquid. This is somewhat lower than in the rest of Europe, where pension funds are only 35% of total financial assets in the household sector. Many countries in Europe are struggling with non-funded pension systems, which could provide challenges in the future; thus, low pension savings are not a strong point when the population is ageing. Pensions funds are an important part of assets Liquid financial assets are also in positive territory 35 3 In % of GDP 4 3 In % of GDP Gross financial assets Pension assets Liquid financial assets, net -4 Source: Households, Statistics Denmark Source: Households, Statistics Denmark Even though pensions are not fully liquid, some pensions can actually be paid out before retirement with a tax penalty. The tax penalty is 6%, which is high but compared with the highest marginal tax for labour income of 51.5%, it is not materially different. Labour market pensions can typically not be withdrawn before retirement. As mentioned, pension savings consist partly of deferred taxes. On average, deferred taxes amount to something like 4% 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 taxed, net financial assets amount to 1% 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 houses is 148% of GDP. If we add the value of houses to the financial assets, it becomes quite clear that Danish households have a strong asset-liability position. Net assets including houses add up to 37% of GDP. The level has been increasing since 29 and the level is now only slightly below the level reached just before the financial crisis hit the Danish economy this is despite house prices being below the level before the crisis. 8 1 November 214

9 The value of non-financial assets is also significant Significant net assets when houses are included Houses owned by the household sector, % of GDP Net assets including houses in % of GDP Source: Realkredit Danmark Source: Realkredit Danmark, Statistics Denmark In the wake of the financial crisis, the Danish housing market underwent a crisis. From the peak in 27 to the bottom in late 211, house prices fell by an average of 2.1%. While the market has turned over the past couple of years and prices have been rising since the beginning of 212, prices remain 14.5% below the pre-crisis level. However, there is no doubt in our minds that the market has turned. House prices are now 7.1% higher than at the bottom in 211. Apartment prices fell even more rapidly than house prices during the crisis. From top to bottom, apartment prices fell almost 3%. However, apartment prices have risen by 29% since the bottom in 29 and are currently only 9.2% below pre-crisis 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 23% 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. House prices are increasing again The population is set to increase Index214 = 1-19 years 2-64 years More than 65 years Total population Source: Statistics Denmark Source: Statistics Denmark In the long run, house prices are 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 58, persons or 1.4% by 25. 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 4%. The organisation expects the number of inhabitants of traditional working age to increase by 1%, while it believes the number of people over 65 will increase by 48%. Although population growth is not uniform, it expects the population to increase in all age groups and, in our view, demographics will in no way put a bomb under the housing market. Instead, population growth is likely to lift house prices slightly. 9 1 November 214

10 1979K1 198K1 1981K1 1982K1 1983K1 1984K1 1985K1 1986K1 1987K1 1988K1 1989K1 199K1 1991K1 1992K1 1993K1 1994K1 1995K1 1996K1 1997K1 1998K1 1999K1 2K1 21K1 22K1 23K1 24K1 25K1 26K1 27K1 28K1 29K1 21K1 211K1 212K1 213K1 214K Number of properties Research Denmark 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.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 21/11, households have increased savings significantly and the risk of significant problems related to the household sector seems to us to be even smaller now. The number of forced sales has stayed relatively low Arrears at the mortgage banks 25 2 Agriculture property Single family homes Owner-occupied apartments Second homes Multi-family housing Combined commercial and private property Development land Arrears in % 3, 2,5 2, 15 1, ,,5, 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 3 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.7%. Before 2, 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 4.7pp in two years to 26.1% of household 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 23, the starting point of the time series. As of Q4 13, it was an estimated 5% 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 219) for interest expenditure beyond DKK5,, or DKK1, for a married couple. The DKK5,/1, limit is not indexed, so eventually inflation will slowly cause the tax deductibility to be lowered. 1 1 November 214

11 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, it is hard to see where this pressure should come from in the near future. 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 % after-tax income 9. percentile 75. percentile Median 25. percentile 1. percentile Income decile 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 1th percentile for the 1th income decile is 42%. This means that 1% of the families in the 1th income decile have a gross debt ratio below or equal to 42%. The median (5th percentile) for the 1th income decile is 272%, implying that 5% of the families in the 1th income decile have a gross debt ratio below or equal to 272%. The 9% percentile of the 1th income decile shows that 1% of the families in the 1th 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 21 published in its Monetary Review 212, 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. Definition of financial margin Disposable income - redemptions on mortgage loans - housing occupancy expenses - other fixed expenses - a sufficient disposable amount = financial margin Source: Danmarks Nationalbank 11 1 November 214

12 Breakdown of debt by financial margin Financial margin Mortgage debt Bank debt Other debt (1 DKK) (DKK bn) < > SUM Source: Danmarks Nationalbank Breakdown of debt by financial margin after 5pp interest rate shock Financial margin Mortgage debt Bank debt Other debt (1 DKK) (DKK bn) < > SUM 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 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 21 data and that interest rates are lower today than in 21. Therefore, it is likely that households are more robust to a 5pp interest rate shock today than in 21. 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, 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 November 214

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