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Can ‘middle class’ Danish people afford to own a car?

Recent social media claims have insinuated owning a car is out of the financial reach of normal families in Denmark. We look at the data.

Cars parked on a dealership forecourt in Denmark.
Cars parked on a dealership forecourt in Denmark. Are they really unattainable for large sections of the population? File photo: Henning Bagger/Ritzau Scanpix

Carla Sands, the former United States Ambassador to Denmark, was last week ridiculed for claiming large parts of the Danish population cannot afford to own a car.

Sands, who was appointed by former president Donald Trump and served as ambassador from 2017-2021, claimed in a Twitter post on Friday that “in Denmark, middle class people can’t afford to drive a car”.

People in Denmark “have a bike and take the train for long trips. My embassy driver would bike an hour in the snow to get to work,” Sands tweeted.

The tweet elicited responses from Danish politicians members of the Danish public, with Sands largely mocked for the claim.

Tweeting a picture of himself on a bicycle, former Minister of Transport Benny Engelbrecht wrote that “I can assure you that using the bike for urban mobility is a question of choice, not economy for most Danes. This is for instance me in my time as minister — and don’t worry, we could afford a car.”

READ ALSO: ‘Danish royals can’t afford a car’: Former US envoy to Denmark ridiculed over cycling tweet

According to official data, there were 2.79 million private cars on Danish roads at the beginning of 2022. The country’s population is 5.8 million.

Around 276 million cars were registered in 2020 in the United States, where the population is around 330 million. So there are indeed more cars per person in the US than in Denmark.

But is this really because Danes can’t afford cars, or are other factors more important?

It’s unclear exactly who Sands was referring to by “middle class people”, since Danish society does not have such highly differentiated social classes as, for example, the United Kingdom.

Nor does the Scandinavian country have the sort of chasm between rich, middle and poor incomes that isolates communities from each other enough to make classes easily definable – even though economic segregation is reported to be on the increase.

Official statistics suggest that families in Denmark are becoming increasingly likely to own a car. A July 2021 report from official agency Statistics Denmark notes a significant increase in the number of car-owning households between 2011 and 2021.

The number of households who own one or more cars increased by 233,800 over the ten-year period, according to the agency.

That equates to 62.3 percent of all households owning a car in 2021, compared to 59.6 percent a decade prior.

READ ALSO: Six things to know about buying a used car in Denmark

In four Danish municipalities – all located in Jutland – over 30 percent of families own more than one car (i.e. two cars or more). This was not the case anywhere in the country in 2011.

The agency’s data shows that there is a difference between car ownership in urban and rural areas – supporting Engelbrecht’s argument that bicycles are a popular choice for urban mobility. In the Greater Copenhagen area, under 60 percent of families own a car, while the proportion can increase to over 80 percent in municipalities just outside of the capital’s urban sprawl.

There is also a difference between the types of family households with relatively high and low car ownership.

Amongst families with high levels of car ownership are couples with children, of whom over 90 percent owned a car in 2021.

People in executive jobs also owned a car in over 90 percent of cases in 2021, while 84 percent of those who lived in detached house also owned a car.

This supports the suggestion that the more affluent are more likely to own a car, which is perhaps unsurprising.

Single people without children owned a car in 40 percent of cases in 2021, while those with the lowest amount of disposable income – the 10 percent of the population with the smallest amount of monthly disposable income – owned a car in 14 percent of cases.

People who live in Greater Copenhagen or another city with 100,000 or more residents owned cars in 42-48 percent of cases in 2021. A similar proportion – 39 percent – applies to people who live in apartments.

Given the high cost of living in Copenhagen, where rent and house prices are far higher than elsewhere in Denmark, it’s conceivable that, if all other factors are equal, a household in the capital might have less money available to run a car. Or perhaps they just don’t need one?

Small towns or villages with populations less than 2,000 had car ownership percentages of 77-80 percent in 2021, much higher than in Copenhagen.

A separate 2021 analysis from Statistics Denmark states that close proximity to a bus, rail, metro or light rail network correlates to the amount of people who own cars.

According to the analysis, around 360,000 people over the age of 18 in Denmark have easy access to a very high level of public transportation – meaning at least 10 departures per hour and more than one type of service located with 500 metres of where they live.

Just under one million have slightly lower access – 4-9 departures per hour – while around one million do not have a permanent bus stop or rail station within 500 metres of their home.

In Greater Copenhagen, 77 percent of all people have a high public transport service level. This falls to under one percent in towns with fewer than 200 inhabitants.

More than 80 percent of families in areas with the lowest levels of public transport own one or more cars. This figure is 39 percent in areas with very high service.

The analysis also found that families in areas with high levels of public transport coverage are less likely to have a car than families in areas with medium or low levels of public transport.

Calculations intended to correct the trend for factors including income, age, family type, children, socioeconomic group and commuter distances found that people in rural areas with less public transport were still more likely to own cars, albeit by a smaller difference.

For a family in an area with very high public transport coverage, the probability of having a car was calculated to be 57 percent. An equivalent family (with the same income, city size, distance to work etc.) in a low public transport area was found to be 68 percent likely to have a car, the report notes.

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PROPERTY

EXPLAINED: How to restructure and reduce your mortgage in Denmark

Denmark's unique borrowing system has enabled thousands of people to restructure their mortgages this year, cashing in on high interest rates which have caused a drop in market value of covered bonds. We explain how it all works and how you can potentially pay off a sum of your mortgage.

EXPLAINED: How to restructure and reduce your mortgage in Denmark

How does the mortgage system work in Denmark?

Denmark has a unique mortgage model, which is regarded as one of the best in the world.

When you take out a loan to buy a house in Denmark, the bank finances the loan through a covered bond [Danish:realkreditobligation,ed.] What makes the model unique is that you as the borrower know exactly what covered bond is issued to finance the loan.

“This direct link is very special to Denmark,”  Peter Jayaswal, executive director at Finans Danmark told The Local.

“You can follow what the market price is for the bond that is funding your loan in the capital market. A German borrower for example has a mortgage by the German bank issuing a loan using a covered bond. But there is no link, so the homeowner doesn’t know what the bond is.

“In Denmark, you can see it exactly. You can go onto your bank website everyday and follow the market price. That means that we have this early repayment system where I as a borrower am allowed to prepay my loan by buying back at market price the bond that has funded my loan,” Jayaswal explained.

When interest rates are increasing, it means that the price on the bonds is decreasing and this is why thousands of homeowners in Denmark have bought out their bonds this year, at a low market value and paid off a portion of their mortgage. 

READ ALSO: Interest rates encourage Danes to restructure mortgages

So how can I make this early repayment on my mortgage?

The first thing to do is to set up a meeting with your bank so they can assess whether you will benefit from the drop in bond value.

The market price of covered bonds is well documented in Danish media but you can also follow them on your bank’s website or by asking for an appointment with your bank to assess your current mortgage.

“You may at some point in the past have taken out a mortgage of 1 million kroner with a one percent fixed interest rate. To keep it simple, let’s say the loan is without amortisation.  When you took out this mortgage, the bond was issued at 99 kroner meaning that the nominal debt will be around 1,010,100 kroner to give a 1 million kroner revenue.

“Today you can see the interest rates have increased and the price on the bond financing your loan is say 80 kroner. As a borrower you can buy the bond in the market at market price and prepay the mortgage loan. But you only need to take out a new loan of around 808,000 kroner to do this.

“So you can take a new loan out at 808,000 kroner and use this to repay your existing loan and reduce your debt by around 200,000 kroner. This transaction can be done simultaneously by your bank, so you won’t end up with two loans,” Jayaswal told The Local.

What about interest rates on my mortgage?

The interest rate you get for your mortgage can be fixed or variable and they mirror the prices investors pay for the bonds. 

Fixed rate mortgage

Today, the fixed interest rate is five percent. This means that if you decide to buy your bond at the lower market value, you will have to take out a new loan at a higher interest rate.

“Using the example of reducing your mortgage by 200,000 kroner by buying the bond at a low market value, every month you are now paying an interest rate of five percent fixed term, rather than your one percent you had before. So you are paying more each month for the benefit of paying off a portion of your mortgage early and the benefits will decrease over time. 

“You usually break even after around ten to fourteen years but the bank will calculate this for you,” Jayaswal said.

“If you know you’re moving in two to three years, it makes sense to get a new loan with a higher interest rate because you’ll have to repay the loan anyway when you move. But if you think you’ll be in your home a long time, keeping this loan, then you need the interest rate to decrease in ten to fourteen years.

“And that’s the problem because we must be frank and say we can do all the forecasts but in the end no one knows what future interest rates will be, so it has to be the decision of the borrower,” Jayaswal explained.

Variable rate mortgage 

The other option is to take out a variable interest rate mortgage to buy the bond, which today is around three percent. However this carries a risk, as the interest rates are adjusted on a regular basis. F3 loans, for example, are adjusted every three years, while F5 loans have adjustments every five years.

“Changing from a fixed to variable interest rate, to reduce your debt and avoid an increase in interest rate, comes with a risk that you don’t have a fixed rate for 30 years, so you are more exposed and that’s very important be aware of,” Jayaswal told The Local.

On Monday, the company Totalkredit, the largest provider of real estate loans for private homes, auctioned flexible loans with resulting interest rates exceeding 3 percent on the F1, F3 and F5 loan types. That means the interest on these types of mortgages will be at their highest for several years.

According to Finans Danmark, Danish home owners have repaid 337 billion kroner of their mortgages in the first three quarters of 2022. Many of these home owners have chosen to switch to variable interest rates. You can swap back to a fixed-rate mortgage at any time but you also have to be aware that these rates may have increased by then too. 

How do I decide which option to take?

“I always say to people, feel free to go to your bank, ask them to make the calculations for you, so you have the foundation to make a decision”, Jayaswal says.

“Some might think a 30-year mortgage at a fixed rate of one percent is great, especially because today interest rate is five percent. Others won’t mind paying a five percent interest rate for a few years, because they want to reduce their debt today and believe interest rates will decrease. It is up to the borrower to decide.

“It’s not that one option is better than the other, it’s that you have opportunities and this is unique in Denmark,” Jayaswal said.

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