Resilience of the Danish Housing Market: Implications of Interest Rate Risk

Martin Rasmussen

Student thesis: Master thesis


The purpose of this master thesis is to analyse the resilience of Danish households and the factors creating risk for this group. The overall risk exposures for households are found to be within credit risk and asset/equity risk. Nevertheless, both these factors are influenced by interest rate. The negative correlation between house prices and interest rates creates a setting were both adjustable and fixed interest rate loans are exposed to fluctuations in interest rate levels. These fundamental connections have created a basis for the analysis of resilience among Danish households. The current resilience is deemed manageable, yet it is important to monitor developments. The analysis of elements such as ban types, interest-only loans, contribution rates have produced the conclusion that as much as 276,000 households could be exposed. Exposed if interest rates are increased. This amount is significantly higher than estimated by Danmark's Nationalbank and the Danish FSA. The increased estimation is the result of a different approach and weighting to risk factors such as ban type, interestonly, technical insolvency etc. This altered approach has increased the estimation. A discussion of initiatives that could improve resilience has been conducted. These initiatives include among others higher equity requirement when purchasing real estate, higher demands when obtaining adjustable interest rate loans and restrictions for withdrawal of equity. It is believed that some of these initiatives could improve resilience and create a more healthy housing market. Especially initiatives regarding equity could effectively support borrowers in avoiding technical insolvency. While restrictions concerning adjustable interest rate loans would decrease credit risk. Findings and characteristics concerning the Danish housing market have been compared to European and other comparable countries. This comparison has shown that there are fundamental differences within these housing markets. However, it has also provided benchmarks and indicated that other methods are useful. Countries such as Finland and Austria have prohibited equity withdrawal, which has been a muchdebated subject in Denmark. This area and others have shown that foreign perspectives could be very useful in developing the Danish housing market.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2016
Number of pages92