The owner-occupiers’ capital structure during a house price boom
AbstractHouse and flat prices have been through a tremendous bust and boom cycle in Denmark. From 1986 to 1993 real prices for houses and flats dropped by one third on average, foreclosures accounted for around 1/6 of the house and flat turnovers in numbers, and in reality the market for owner-occupied houses and flats was in a crisis. Initiated by a strong interest rate drop and by an expansive finance policy, the market turned. From 1993H1 to 2004H1 real house prices increased 76% and real flat prices 128%. Moreover, Denmark has a leading position in the international household debt race and as in many other countries the fear of the consequences of a strong interest rate increase for the housing market is widespread. Therefore, in order to examine the financial stability among owner-occupiers, a sample of approx. 40,000 owner-occupier families with data at household level has been drawn from the tax statistics for each year from 1987 to 2003. Through the analysis it is shown that the distributions of the owner-occupiers’ capital structure, measured by the net liability/housing wealth ratios, have more or less been the same throughout the 16 years, even during the long-lasting steep house and flat price rise. Moreover, since 1994 the median value of the net liability/income ratio has increased by 71% for all owner-occupiers and by 54% for owner-occupiers between 30-39 years of age.Finally, one last, important aspect of the financial stability of owner-occupiers, namely, their capacity to service their debt has been analysed. The owner-occupiers’ net interest expenditures/ income ratios before tax have been nearly halved from 1987 to 2003. Most of the drop happened during the years of the “housing market failure. From 1994 on the ratios were more slightly reduced and were in 2003 at 8.8% (median value) for all owner-occupiers and 12.2% for owner-occupiers between 30-39 years of age. However, if the reductions of the tax rates for deducting interest expenditures are taken into account, the 2003 after-tax-ratios are only about 2 percentage points below the 1987 after-tax ratios. At March 2005, a new challenge facing Danish owner-occupiers is that 50% of their mortgages carry interest adjustment.
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Bibliographic InfoPaper provided by Copenhagen Business School, Department of Finance in its series Working Papers with number 2005-3.
Length: 55 pages
Date of creation: 01 May 2006
Date of revision:
Contact details of provider:
Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark
Phone: +45 3815 3815
Web page: http://www.cbs.dk/departments/finance/
More information through EDIRC
house prices; housing wealth; real estate wealth; housing debt; mortgage debt; personal wealth; personal finance; loan-to-value; debt-to-income; interest expenditures; interest-to-income; financial stability;
Find related papers by JEL classification:
- D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General
- R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-07-02 (All new papers)
- NEP-FIN-2006-07-02 (Finance)
- NEP-FMK-2006-07-02 (Financial Markets)
- NEP-GEO-2006-07-02 (Economic Geography)
- NEP-MAC-2006-07-02 (Macroeconomics)
- NEP-URE-2006-07-02 (Urban & Real Estate Economics)
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