The housing and credit affordability for Danish owner-occupiers during the recent boom and bust period

Olena Denysyuk

Student thesis: Master thesis


The purpose of this paper is to study the Danish housing market development during the 1993- 2010 period on the background of the international financial crisis, international research and general economic theories. I started the analysis by pointing out the following imbalances: the favorable economic conditions during the recent housing boom times (2000-2006), such as low interest rate, low unemployment, increased earnings potentials and increased housing wealth improved households’ ability to borrow. On the other hand, the skyrocketing increase in housing prices did not improve households’ ability to buy and sustain a house. However, banks continued to lend and borrowers continued to borrow, because of a general belief that housing prices would only increase in the future, and if they did not buy now, they would not be able to afford it later. This irrational behavior led to an over-optimistic assessment of borrowing ability, risk under-estimation and over-indebtedness. All this further contributed to increased level of forced sales, negative equity, bank looses and write-downs- the sources of imbalances on housing and credit markets. I emphasized that affordability is a measurable concept that might serve as a tool to better sustain the housing market from imbalances, by describing house buyers’ present ability to invest in real estate. Therefore, I aimed to investigate how housing and credit affordability developed without relying on over-optimistic expectations. To approach the analysis, I addressed the usefulness of the affordability concepts, by distinguishing between housing affordability and credit affordability. Applying price-to-income ratio- the measure of housing affordability- it appeared that the growth in housing price did not coincide with the growth in gross national income or net disposable income. So, price-to-income correlation was not in equilibrium. Applying interest burden measure and financial margin ratio- the measures of credit affordability- the evidence has shown that credit affordability was the main single factor explaining the evolution of housing boom. Thus, the decline in interest burdens of owner-occupiers was pointed out to be the main driving power in housing purchase decisions. However, taking risk factors into account, such as increased exposure to interest rate risk, increased housing volatility and increased indebtedness, Danish owner-occupiers’ vulnerabilities also increased. Therefore, I stressed that housing affordability has to be superior to credit affordability. I recommended that lending that is based on the housing affordability approach, will prevent irrational behavior, over-indebtedness and promote stability on the housing market.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2011
Number of pages193