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Should we be more like Denmark?

There's a lot to like about Denmark's approach to mortgages, but transplanting it to Australia may not be optimal given our existing regulatory framework and housing policies.
Should we be more like Denmark?
Photo by Nick Karvounis / Unsplash

Monday's free post looked at the housing model in Vienna, Austria, concluding that it's probably not something we could easily transplant into Australia, even if we wanted to. But it got me thinking – what about other countries? Specifically, countries that also rely on market-based housing and might be more applicable to Australia than a small, homogeneous city in Austria. How are their markets structured?

Now, for market-based insights one can't help but start with the US, given its enormous size. The US can certainly be a quirky place, and it turns out that its housing industry is no exception. Instead of borrowing at variable rates like almost everyone does in Australia, when you take out a mortgage in the US you're generally locking in the rate for up to 30 years. And it's not alone; some European countries – specifically France – also lock in mortgage rates for an average of 20 years. The IMF recently provided a helpful graphic showing the "vast differences" between countries, with Australia down at the variable extreme and the US at the the fixed extreme.

What the chart doesn't show are terms. For example, the UK has a relatively large share of fixed mortgages but they're mostly for fewer than 5 years, so in practice they're not all that dissimilar to Australia.

Now, banks borrow short and lend long – how on Earth do they manage the enormous maturity mismatch risk that a 30-year fixed-dominated model entails, and could we implement something similar in Australia?

The French model

In France, covered bonds with mortgages used as collateral are the go-to method (it's the largest covered bond-issuing country in Europe). The credit risk remains with the originator, but the the industry also self-insures them (Crédit Logement) so that the system as a whole can absorb any failures. The fact that banks are still on the hook gives them the "incentive to manage it prudently", as opposed to the securitisation model used in the US, which allows the risk to be passed on.

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