Denmark’s housing market continues to show spectacular performance, with residential property prices surging, boosted by negative interest rates. During the year to end-Q1 2016, the price index of owner-occupied flats soared by 9.16% (also 9.16% when adjusted for inflation), according to Statistics Denmark. Quarter-on-quarter, nationwide house prices increased 3.69% (3.28% inflation-adjusted) in Q1 2016.
Nationwide, the average price of owner-occupied flats stood at DKK2.02 million (EUR271,950) in March 2016. On the other hand, one-family homes are priced at an average of DKK1.9 million (EUR256,080) over the same period.
One-family homes saw more modest price rises of 2.4% y-o-y in Q1 2016 (2.4% inflation-adjusted). In a quarterly basis, one-family home prices increased 1.8% (1.4% inflation-adjusted) during the latest quarter.
Because of strong house price rises, the International Monetary Fund (IMF) has recently urged the Danish government to reverse its negative interest rates mandate and introduce new policies, such as zoning rules and relaxing rental market regulations, to avoid a disastrous housing bubble.
“We strongly encourage the authorities to take early action to lean against the wind on house price increases,” said David Hofman of the IMF.
The Danish economy grew by a meager 1.2% in 2015, after an expansion of 1.3% in 2014, and contractions of 0.5% in 2013 and by 0.7% in 2012, according to the IMF. The economy is expected to expand by 1.2% this year and by another 1.9% in 2017, according to the European Commission.
Property prices in Denmark peaked in Q2 2007, after huge rises during 2003-2007:
Property prices then dropped about 15.4% (-19.3% inflation-adjusted) from Q2 2007 to Q3 2009 due to the global financial meltdown, dragging many regional lenders into bankruptcy and pushing the economy into recession.
The biggest price-drop occurred in the Capital Region where house prices fell by 25.3% (-28.8% real). House price falls in other regions ranged from 21.3% for Zealand (-24.9% real), to 2.2% in North Zutland (-6.7% real). Copenhagen house prices dropped 21.6% (-25.2% in real terms).
The regions that experienced the highest price rises during the boom generally had the biggest price falls during this period.
After a short-lived recovery from Q3 2009 to Q3 2010 (with property prices rising by 4%, or 1.6% when adjusted for inflation), property prices fell again by about 9% from Q4 2010 to Q4 2012, mainly due to the adverse impact of the eurozone debt crisis. The housing market has gradually recovered since then.
Demand rose strongly in 2015, after several years of sluggish growth. The number of registered sales for one-family houses climbed 19.2% to 42,881 units in 2015 from a year earlier, according to Statistics Denmark. Likewise, sales for owner-occupied flats also surged 22.5% to 19,985 units over the same period.
However, demand has fallen again in the first quarter of 2016 due to worsening economic outlook. In Q1 2016, the number of registered sales fell by 22.5% y-o-y for one-family houses and by 20.5% y-o-y for owner-occupied dwellings.
The average time-on-market to sell a house remains very high, but is now declining for all property types.
In recent years, new designated development areas have been built close to the centre of Copenhagen.
Other parts of Copenhagen that are currently experiencing an upsurge in construction activity include the southern part of Copenhagen Harbour, the eastern area of Amager, and the southwestern part of the Capital.
Residential construction permits, starts, and completions all rose during the first quarter of 2016:
From an average of almost 29,500 permits in every year in 2002-07, residential permits plunged to just an average of 14,000 annually in 2008-14. Residential construction recovered strongly in 2015 with about 20,500 permits.
In January 2016, Danmarks NationalBank increased its interest rate on certificates of deposit by 10 basis points to -0.65%, the first rate hike in two years. The lending rate, discount rate and the current account rate have been unchanged at 0.05%, 0%, and 0%, respectively. The rate hike follows the central bank’s sales of foreign exchange in the market.
Despite this, mortgage interest rates continue to fall. This might be an indication that the impact of the key rate, as a monetary policy instrument, is now waning. The short-term mortgage rate averaged -0.16% in 2015, down from 0.19% in 2014, 0.23% in 2013, and 0.47% in 2012, according to the Association of Danish Mortgage Banks (ADMB). Likewise, the long-term mortgage rate also dropped to 2.77% in 2015, from 3.08% in 2014, 3.48% in 2013, and 3.67% in 2012. In May 2016, the short-term mortgage rate fell to -0.23% while the long-term mortgage rate dropped to 2.65%.
The size of the mortgage market was equivalent to 129.1% of GDP in 2015, up from 128.7% of GDP last year, but still down from 133.7% of GDP during the peak year of 2009. Total mortgage outstanding has risen by just an average of 2.3% annually from 2009 to 2015, after an annual growth of 7.8% from 1998 to 2008.
In March 2016, total mortgage outstanding stood at DKK2.57 trillion (EUR345.4 billion), up by 2.3% from the same period last year, according to the ADMB.
Mortgage arrears fell to an average of 0.24% in 2015, the lowest level since 2007, based on figures from ADMB. Likewise, the total number of repossessed dwellings dropped 14% y-o-y to just 194 units in Q1 2016 – the lowest level in seven years.
While household debt has continuously fallen in the past six years, the Danes remain the most indebted people in the OECD. Danish households’ average personal debt equals 305% of income, down from 311% in 2013, 313% in 2012, 320% in 2011, 325% in 2010, and 339% in 2009, according to the Organisation for Economic Cooperation and Development (OECD).
Huge debts can put a strain on household finances, thereby negatively affecting the borrowers’ ability to satisfy their loan repayments. Worse, any rise in interest rates will further increase household burden. Despite this, Danish households’ substantial debt is no a serious threat to financial stability, according to Danmarks NationalBank. Most Danish households have sufficient income to handle rising interest rates.
“The vast majority of households with high debt levels are financially robust, and as far as mortgage debt is concerned, the repayment ability of households has proved to be robust,” says Danmarks NationalBank.
Despite the central bank’s assurance, others remain worried. No less than 57% of Danish mortgages have long interest-only periods, up from only 10% in 2004. Adjustable-rate mortgages were 61% of all mortgages in 2015 (from 38% a decade ago). Danes are paying down mortgages at a rate of only 2% a year on average, and their monthly payments rise sharply when the interest-only periods end (typically ten years into the loan). Refinancing is an option for many, but not for the most precarious borrowers, due to legal restrictions on loans of more than 80% of a property’s value, according to the Economist.
Denmark’s US$550 billion mortgage bond market might be heading for a “potential crisis”, if interest rates will substantially increase. Rating companies are worried. The share of bonds with maturities of less than five years has increased to 66% in 2015 from 47.5% in 2008, based on figures from the Association of Danish Mortgage Banks (ADMB). The mismatch means that some bonds must be rolled over each year.
In recent years rental yields have recovered in Denmark, as rents have risen faster than house prices recently. Average rental yields in Copenhagen typically range from 4.84% to 5.31%, according to Global Property Guide research.
Unsurprisingly, smaller apartments offer higher rental yields. Apartments of 120 square metres (sq. m.) yield 4.84% while apartments of 50 sq. m. yield 5.27%.
Denmark’s housing market is fundamentally distorted by misguided social policies. The private rental market is strongly pro-tenant (see Landlord and Tenant section). Rents are non-responsive to market forces because there are five different forms of rent control, depending upon the age of the building. Private sector rents are regulated based on historic costs, and there is a huge social rental sector.
Progressively, the private rental sector has been discouraged:
Only rental dwellings constructed after 1991 are exempt from rent control (less than 1% of dwelling stock, or about 10,000 to 15,000 units). Yet rather few new private rental dwellings are now being built.
Owner-occupied dwellings, which cater mainly to families, receive generous benefits from the government. Aside from mortgage tax relief, house owners are also entitled to a standard deduction for home maintenance. About 21% of households in Denmark receive housing subsidies from the government, the highest rate in the EU. Although there has been a slight decline in owner-occupancy in favour of social housing, this is due to the rise of single person households.
In 2008, Denmark was one of the first countries in Europe to go into recession. The economy contracted by 0.7% in 2008 and by 5.1% in 2009.
Boosted by government spending and the global recovery, Denmark’s GDP rose by around 1.6% in 2010 and by another 1.1% in 2011. However it shrank again by 0.7% in 2012, and 0.5% in 2013. In 2015, the economy grew by a meagre 1.2%, after expanding by 1.3% in the previous year.
The economy is expected to expand by 1.2% this year and by another 1.9% in 2017, according to the European Commission.
Inflation slowed sharply to 0.2% last year, from 0.4% in 2014, 0.8% in 2013 and an average of 2.2% from 2000 to 2012, according to the European Commission. Inflation is expected to hit 0.4% this year, based on government estimates.
Denmark’s unemployment was 4.2% in April 2016, down from 4.5% in the previous month and 4.7% a year earlier, according to Statistics Denmark. Over the same period, unemployment for men stood at 4.1% while it was 4.3% for women. Overall unemployment had averaged 4.9% from 2007 to 2015.
There were about 114,558 unemployed persons (seasonally-adjusted) in the country in April 2016, down by 8.8% from 125,670 in the same period last year, based on figures from Statistics Denmark.
After the Social Democrat prime minister Helle Thorning-Schmidt took austerity measures that improved government finances, the country recorded a public budget surplus of 1.2% of GDP in 2014, after a deficit of 1.1% of GDP the previous year. However, in 2015, spending increases again in an effort to prop up the economy, resulting to a budget deficit of 2.1% of GDP.
Denmark’s budget deficit is projected at 2% of GDP this year, still below the EU threshold of 3% of GDP.
Gross public debt stood at 40.2% of GDP in 2015, down from 44.8% of GDP in 2014. The country’s public debt is projected to decline to further to 38.7% of GDP this year, according to the European Commission.
Mrs Thorning-Schmidt’s measures, which successfully improved the country’s finances, were however unpopular, resulting in her party’s defeat in 2015 and her resignation. In June 2015, Lars Lokke Rasmussen leader of the centre-right liberal party, Venstre, returned for his second innings as Denmark’s PM.
Despite Denmark’s association with liberalism, it is not easy to acquire property here.
Nonresidents may not purchase real property here unless the person:
There are some special restrictions on foreign ownership in some areas, especially when buying summer holiday homes. This is particularly prevalent in coastal areas. These are popularly known as the ‘anti-German rules’; because they are designed to prevent coastal areas from being overrun by German second home owners.
However, the purchase of “all-year-round” properties, which are not located in popular areas along the coast, is possible as long as you satisfy the aforementioned requirements.
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