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Distributions of owner-occupiers' housing wealth, debt and interest expenditureratios as financial soundness indicators

Author

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  • Lunde, Jens

    (Department of Finance, Copenhagen Business School)

Abstract

The Danish housing market boomed from 1993 to the end of 2006. The house price increases from 2003 to 2006 were especially dramatic and cannot be explained satisfactorily by "fundamentals”. Moreover, the owner-occupiers are highly indebted; Denmark is the nation with the highest household debt/GDP, highest total liabilities/net wealth and highest mortgage debt/net non-financial wealth ratios among 15 OECD countries. Obviously, an analysis of the financial soundness of owner-occupiers is topical in order to analyse financial stability in society. The financial soundness of Danish owner-occupier families is analysed using relevant financial indicators for the owner-occupiers’ capital structure and interest payments. Tax statistics for the owner-occupier families are used here. In a financial soundness perspective macro data are of limited importance as they express total and average changes. Distributional data at the micro level, formed at the family (household) level, are important for recognizing changes in the financial soundness of the nation. The data are used to estimate important financial indicators as debt/income, housing wealth/income, debt/housing wealth and net interest expenditure/income ratios for the families’ total financial situation and capital structure. The result is that the financial soundness of Danish owner-occupiers, measured as net liability housing wealth ratios, has not improved since the owner-occupation crisis in the years 1987-1993. Furthermore, their housing wealth/income and net liability/income ratios have increased since 1993 to "all-time high” levels, just as in the other OECD countries; net interest expenditure/income ratios have been reduced in a before-tax perspective, but not much in an after-tax perspective. The substantial heterogeneity of the families is considerably reduced by adjusting for age as a proxy for the life cycle. Moreover, the income variation is also reduced considerably within each age group.

Suggested Citation

  • Lunde, Jens, 2007. "Distributions of owner-occupiers' housing wealth, debt and interest expenditureratios as financial soundness indicators," Working Papers 2007-1, Copenhagen Business School, Department of Finance.
  • Handle: RePEc:hhs:cbsfin:2007_001
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    File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7161
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    References listed on IDEAS

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    1. Englund, Peter & Ioannides, Yannis M., 1997. "House Price Dynamics: An International Empirical Perspective," Journal of Housing Economics, Elsevier, vol. 6(2), pages 119-136, June.
    2. Palle S. Andersen & Neale Kennedy, 1994. "Household saving and real house prices: an international perspective," BIS Working Papers 20, Bank for International Settlements.
    3. Davis, E. Philip, 1995. "Debt, Financial Fragility, and Systemic Risk," OUP Catalogue, Oxford University Press, number 9780198233312.
    4. Jonathan McCarthy & Richard Peach, 2004. "Are home prices the next "bubble"?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-17.
    5. Guy Debelle, 2004. "Household debt and the macroeconomy," BIS Quarterly Review, Bank for International Settlements, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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