Mortgage debt and wages: A comparison of Britain and Denmark

James Wood - Doctoral Researcher, Department of European and International Studies, King’s College London

Since the 1970s, the total amount of wages as a share of gross domestic product (GDP) has declined across the advanced OECD countries in favour of capital. This reduction in the share of the proceeds of economic activity going to workers contributes to the wider trend of increased social inequality. The phenomenon of ‘financialisation’ has been identified as the predominant cause for the reduction in the wage share in advanced economies. Financialisation can be understood as the increase of financial sector activity that has occurred in part due to the widespread increase of household debt, which for most households takes the form of mortgage debt. Engagement with financial services is considered a mode of behaviour regulation and taking on household debt establishes ‘investor identities’ for borrowers, which disciplines them to demand and maintain employment to meet their obligations on their mortgage or other debts and stave off the negative legal and social consequences of defaulting. This in turn is seen to reduce the wage bargaining power of employees.

Previous econometric analyses have demonstrated that increased levels of household debt are an important causal factor in the reduction in the wage share in advanced economies. However, not all types of household debt carry the same fiscal burden or the same negative consequences of default, and generalised analyses of the disciplinary effects of household debt mask the specific mechanisms that can lead to a reduction of the wage share.

To evaluate the effects of changes in the total mortgage stock on the wage share of national income a series of times-series regression I conducted a comparative analysis of Britain and Denmark between 1979 and 2012. The key findings of this analysis (to be published in Comparative European Politics) demonstrate that an increase in mortgage credit did have a negative effect on the wage share of national income in Britain between 1979 and 2012, however, no significant relationship was found in the Danish case during this same period.

Such divergent results can be linked to four key variances in the institutional configurations in Britain and Denmark. Firstly, the funding structure differs greatly between British and Danish mortgage markets. Mortgages in Britain are profit making vehicles for capital investment that generate revenue from the interest rate margin between the rate at which banks borrow and lend at. Alternatively, the Danish system provides mortgages at close to market cost, and they generate revenue from charging annual fees that are sufficient to only cover administration costs. For example, in 2015, the Danish central bank moved their short-term interest rates into negative territory, and the negative interest rate was passed on to mortgage borrowers. Therefore, the traditional Danish mortgage model has maintained its distribution of low-cost mortgage credit, which reduces the disciplinary weight of the monthly mortgage debt obligation payment in comparison with the British mortgage market.

Secondly, although mortgage loans in each case are recourse loans that carry the same negative consequences of default, the Danish bond-based mortgage system allows for greater flexibility when it comes to allowing borrowers to renegotiate repayments due to periods of lower income or unemployment than in Britain. In Denmark, the mortgage finance institution is able to renegotiate the mortgage terms with the bond holder to allow borrowers to meet their debt obligations. Alternatively, renegotiating a mortgage in Britain is a complicated process, especially if the mortgage has been divided among many mortgage-backed securities. In 2015, 0.96 per cent of all mortgages in Britain were in arrears, which is more than four times higher than the Danish arrears rate of 0.21 per cent. This is significant as Denmark has an aggregate residential mortgage debt burden that is approximately 110% of GDP, which is much higher in comparison to Britain, which is close to 65% of GDP. Therefore, the difference in structural constraints within the mortgage systems may well have contributed to the much higher arrears rate in Britain.

Thirdly, the reduction in the wage share in financialised capitalism can be linked to the ‘structural weakness of organised labour’ that has marginalised the ability of workers to successfully bargain for higher wages. Social democratic states, such as Denmark, have strong traditions of co-operative collective wage bargaining with much higher rates of union membership when compared with workers in liberal markets, such as Britain. Unionised workers in Britain tend to have higher wages than non-unionised workers, therefore, the reduction in trade union membership in Britain since the early 1980s may have weakened the ability for workers to negotiate for higher wages, which further exaggerates their financial vulnerability when exposed to the disciplinary mechanisms of mortgage finance.

Lastly, the threat of mortgage default from unemployment or lower wages may not have the same disciplinary effects in Denmark due to the strong provision of welfare state services in comparison to Britain. Welfare provision in Denmark is characterised by equality and strong levels of state social spending, whereas British welfare provision is more market-orientated, and the asset-price gains from owner-occupied housing are used as a vehicle to access welfare and care services in old age, such as supplementing retirement income or financing long-term care. Therefore, the British welfare system may reinforce the disciplinary effects of mortgage debt, as homeownership is the primary means of obtaining the necessary asset-price gains to access welfare services not funded by the government.

The deterioration of the wage share is considered a key cause of the decline in British economic growth, therefore, the reliance of homeowners in Britain on the home as a financial asset, accessed by taking on increasing levels of mortgage debt, may actually have a detrimental effect on Britain’s economic performance.

To address the negative effects of mortgage debt on Britain’s economic performance, four key policy ideas from Denmark should be adopted: (1) government promotion of alternative housing tenures instead of focusing narrowly on private ownership; (2) introduce a Danish-style mortgage system that reduces the disciplinary weight of the mortgage payment on the borrower; (3) increase the scope and quality of state welfare provision to decrease the reliance on the home as a financial asset; and (4) develop a cooperative relationship between trade unions and employers to increase wage growth at a rate that also works for the employer.

Adopting these measures, to move towards an overall approach to mortgage debt more in line with Denmark, could begin to not only improve the wage share in Britain, but also could alter attitudes towards homeownership and how homeowners engage with employers and welfare services, which ultimately may have a positive impact on economic growth.