Newsletter Q3 2017 UK

Newsletter Q3 2017

stricter demands in terms of liquidity reserves and lending, e.g. via the Basel regulations, which is putting a dampener on banks’ lending activities. In fact, the lending volumes of domestic banks have been shrinking since the financial crisis, whereas mortgage lending volumes have been growing. In particular the combination of increased mortgage lending and record-low interest rates has driven the surge in demand for real property. The fact that the expansionary monetary policy has had limited effect on real-economic growth in practice is probably due to a combination of factors. One essential factor is that domestic households have greatly increased their savings and bank deposits instead of raising their debt. This may be due to stricter financial regulation and uncertainty about the economic outlook. Low interest rates have served to provide many homeowners with higher disposable incomes and increasing equity, seemingly affecting savings more than spending, at least until 2015. In terms of economic growth, the effect has been limited. In addition, higher savings ratios serve to increase the placement requirements of institutional investors. Similarly, the effect of monetary policy is limited when demographics

indicate fewer young consumers and more senior citizens with a preference for saving. This is especially the case when the latter demographic group stands to benefit from expansionary monetary policy, as this policy to a certain degree is expected to have increased the equity of established homeowners. This matters in a country like Denmark, where an increasing proportion of the population is aged 50+. The business sector has only on a moderate scale increased its debt in order to invest in their own operations. The increase in commercial lending is apparently driven by mortgage loans, mainly via direct bond issues. This suggests that investments are placed in fixed assets and not in core business operations (except for property companies). However, since 2015, banks have seen a slight but upward trend in commercial lending activities. Moreover, because of the low interest rates, the yield on government bonds in particular has plummeted to an unprecedented low. This has made investors zoom in on asset classes other than bonds, as clearly reflected in the overall deposit statistics of domestic investment funds.

Money is invested in bricks and mortar: Private mortgage credit loans head the field (DKKbn)

1,000 1,200 1,400 1,600 1,800 2,000

0 200 400 600 800

2006

2009

2008

2005

2007

2010

2014

2016

2013

2015

2012

2017

2011

Private lending, banks Private lending, mortgage banks

Commercial lending, banks Private lending, mortgage banks

Source: Danmarks Nationalbank

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