occurred during the Schlüter government (1982-1993). The purpose was to improve the foreign commerce bank by limiting resident’s access to credit, by making it more expensive to issue loans for both consumption and house purchases. The aim was to encourage people to increase their private savings. Consequently, the demand for domestic goods and services decreased, in addition to a decline in new housing constructions. Furthermore, the unemployment rate decreased and the housing prices dropped even more as a result of the low level of economic activity.
Minsky argues that there should be increasing credit opportunities in a market before an economic shock can trigger a crisis. The reform changes in the mortgage market in the early1980s opened for new credit opportunities for borrowers. The new loan opportunities resulted both in renewed energy to the banks’ lending quota, as well as growing demand for housing and new constructions. The latter meant that the unemployment rate fell, which further led to a rise in disposable income, and in turn resulted in an opportunity for more borrowers in the housing market. This led to a further demand for housing and mortgage loans, and consequently increased house prices. The introduction of “Kartoffelkuren” in 1986 intended to reduce consumption and raise savings among the Danes, which resulted in a falling housing demand. Rising unemployment and thereby decreasing disposable income led to further decline in demand for housing and thus also a decline in both mortgage loans and house prices.
Cycle 3
Both the first and the second cycle lasted for about a decade, with an average duration of 5.5 years of boom and 4.5 years of recession (André et.al., 2006). The decline in house prices between 1987 and 1992 was corrected during the following years. The third cycle differs as it lasted longer than the two previous, with a boom of 14 years and a positive growth in real housing prices of 176.6 % from 1993 to 2007 (Bødker and Skaarup, 2010). The price level was 72 % higher in 2007 than in 1986 (Shiller, 2005). Interest-only loans were introduced in October 2003 (IMF, 2007; Lunde, 2009a), which amounted for 25 % of all the outstanding debt of Danish households in 2006 (Erlandsen et.al., 2006). There were also introduced new types of fixed-rate loans in 2004 (IMF, 2007).
The downswing of the third cycle is described by OECD as follows:
“The Danish economy is currently experiencing its worst recession in over four decades. The downturn, which started with the unwinding of the property boom has now been compounded by the trade and financial effects of the global economic crisis.“ OECD (2009)
Housing prices fell with 7.6 % in real terms in 2008, and between Q3 of 2007 and Q2 of 2009 they fell with as much as 24 %. Housing prices and the access to credit went hand in hand, and many borrowers experienced major credit loss. Denmark was also experiencing a huge financial and economic crisis after the drop in housing prices. IMF implies that it exists a significantly correlation between the economic cycles and the housing prices, as the housing prices are forward-looking, and consequently in head of the economic development.
According to Minsky’s theory, it is only possible for economic upheaval to have so much influence if the housing market is in a bubble with expanded credit opportunities and optimistic borrowers with low risk expectations. As mentioned earlier, Minsky argues that when the economy is experiencing a boom, the credit availability is in an upward curve as well. This was the case in the period between 2003 and 2006, when the credit availability was expanded even before the crisis in 1996 with floating rate loans, and in 2003 with the possibility of interest-only loans. Especially from 2003 and onwards, the economy was strong and in a period of expansion in Denmark, and many borrowers achieves additional return on their housing investments. This caused more borrowers to enter the market.
A characteristic of the development in Denmark was, however, that the increase in the Danish house prices proved to be a consequence of a housing bubble (Hendricks, 2012).
A short summary of the Danish housing market theory
From 1929 to the “Great Recession” in 2007 the GDP had a growth rate of 2.05 % per year. The global boom in 1960 affected Denmark and they had long periods with high growth rates in the GDP. However, during the “Kartoffelkurven” in the 1980s the growth rate was relatively low. It was not until 1993 the Danish economy started to grow again.
A natural question to raise is whether or not the housing prices alone have been a contributing factor to the recession in the Danish economy, in line with what IMF implies, because of the fact that the Danish housing prices started to fall in advance of the occurrence of the subprime crisis in the American housing market, and thus also before the global financial crisis. The global financial crisis clearly did not make the situation any better for the Danish economy. However, it is important to mention that the crisis itself did not cause the housing crash in Denmark, since the housing prices were declining even the financial crisis. A consequence of the global financial crisis for Denmark was a significant drop in GDP measured in real terms.
5 COMPARATIVE FUNDAMENTAL ANALYSIS
In this section we will provide a comparative analysis of different factors influencing the housing market in Norway and Denmark. The factors we will analyze are historical developments in house prices, gross domestic product (GDP), key interest rates and Jacobsen and Naug’s (2004) most important fundamental factors; interest rates, disposable income, unemployment and new constructions. The purpose of the comparative analysis is to investigate whether developments in the Norwegian housing market today is similar to developments in the Danish housing market when they were experiencing a housing bubble. Moreover, if the high growth in house prices in Norway can be explained by fundamental factors.