Denmark’s housing market remains sluggish, and the economy is struggling.
There was a 2.84% drop in the price of detached and terrace houses in Denmark to DKK10,819 (US$1,903) per square metre (sq. m.) in 2012 (-4.92% inflation adjusted), according to the Association of Danish Mortgage Banks (ADMB). But Copenhagen’s property prices rose by 1.1% to DKK22,540 (US$3,965) per sq. m. over the same period (-1.1% inflation adjusted).
On a quarterly basis, detached/terraced house prices in the country fell by 2.46% (-2.49% inflation-adjusted) in Q4 2012.
Property prices have been falling in all regions. In 2012:
Holiday home prices dropped 6.3% to DKK13,724 (US$2,414) per sq. m. in 2012 (-8.3% inflation-adjusted).
The residential properties doing best are apartments! Maybe people are adjusting expectations downwards. The average transaction price of owner-occupied flats rose in 2012 by 3.9%, to DKK17,968 (US$3,161) per sq. m. (1.7% inflation-adjusted).
During the country’s housing boom (from Q1 2003 to Q2 2007), residential property prices rose by 66.3%, according to the ADMB (56% inflation-adjusted). Property prices dropped about 15.4% (-19.3% inflation-adjusted) from Q2 2007 to Q3 2009 due to the global financial meltdown. This dragged many regional lenders into bankruptcy and pushed the economy into recession. 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 are now falling again, mainly due to the adverse impact of the eurozone debt crisis.
In 2012, the total number of terraced/detached houses sold fell by 1.4% to 6,041 units. The average days on market of terraced/detached houses increased to 223 days in Q4 2012, up from 209 days in Q4 2011.
Danes, with personal debt equal to about 267.31% of income, are the most personally indebted people in the world, based on figures from Eurostat. Yet on some dimensions, the Danish mortgage market is healthy. Mortgage arrears fell to 0.31% in Q3 2012, the lowest since Q3 2008. Likewise, the total number of repossessed dwellings dropped 5.8% to 2,461 in 2012. Yet total mortgages outstanding in the first quarter of 2013 rose 1.7% to DKK2.46 trillion (US$433 billion) from last year, according to the ADMB.
However, foreclosures and loans in arrears are expected to balloon this year, as borrowers of interest-only mortgages will need to start amortizing the whole amount.
In 2003, banks started to give borrowers the option of deferring amortization for as long as a decade. This type of mortgage became very popular and has since grown to about 56% of all outstanding housing loans in the country, according to the ADMB. Now, more than 100,000 borrowers will need to renegotiate their repayment terms if they are to meet their loan obligations, according to the University of Southern Denmark. To prevent a wave of foreclosures, the mortgage industry is now negotiating with the government to soften repayment terms on interest-only mortgage loans.
“The housing market is still having a rough time,” Steen Bocian said. “Even though the pace of declines slowed last year, it’s too early to talk about a turn-around.”
With the Danish economy expected to grow by about 0.5% to 1% this year, house prices may also start to rise, though at a slower rate than inflation, said Steen Bocian of Danske Bank A/S. Bocian expects house prices to increase by 1% in 2013 and by 0.4% in 2014.
The economy contracted by 0.5% in 2012, the country’s worst economic performance in three years.
Denmark has experienced three house price cycles during the past three decades:
The Danish mortgage market operates under a “balance principle.” Mortgage banks, the only financial institutions allowed to conduct mortgage loan and bond activities, are supervised by the Danish Financial Supervisory Authority (DFSA). They act as the direct link between borrowers and investors, and are specialized lenders by implementing all loan functions within the same bank. The DFSA strictly requires mortgage banks to hold at least an 8% capital base.
Before issuance of mortgage loans, banks adopt a strict and conservative approach in determining the value of the loan by assessing the borrower’s capability to service the loan and taking all possible risks in determining the amount of loan issued. This significantly reduces interest rate, foreign exchange, and prepayment risks.
Issued mortgage loans have a maximum loan to value (LTV) of 80% for residential properties. To fund the loan, banks issue mortgage bonds. The strict legal framework of the “balance principle” requires mortgage bonds to match the value and terms of the corresponding mortgage loan the bank is funding. The framework has provisions limiting the currency, interest, and liquidity risks of bonds.
Moody’s rates the bonds in the Aaa-Aa2 level, and in the history of the mortgage market, no default on bonds has occurred. Aside from the security of the bonds, they are attractive to domestic and foreign investors and hedge funds because of the low transaction costs and the high liquidity of the bonds. Nevertheless, investors still incur prepayment risks.
Mortgage banks are responsible for the collection of loan payments, as loans remain on banks’ balance sheets until their maturity. Thus, banks incur credit risks, if either the borrower defaults on the loan or the value of the property doesn’t match the outstanding amount of the loan. In the event that a borrower defaults on his loan, immediate foreclosure and forced sales of the property is implemented.
The strict regulations of the mortgage market limit the risks shared between bond-holders and mortgage institutions, create transparency, and offer investors security. This helps the continued growth of the mortgage market despite tough macroeconomic conditions.
The system has allowed the mortgage market to grow constantly bigger than the Danish economy, from 102% in 2004 to 120% in 2008.
Outstanding lending grew 7.6% in 2008, after growth of 11.7% in 2005, 10.2% in 2006, and 9.8% in 2007.
As of March 2009, total outstanding lending amounted to DKK2,201 (€295) billion, up 7.1% from a year earlier.
The mortgage market issues loans to borrowers capable of servicing their loans. Borrowers are generally well-informed and critical because they base the type of loan they choose on the interest rate developments and use whichever payment option is financially beneficial.
The system offers borrowers flexibility in paying back loans. When interest rates increase, buyers can pay for the loan by buying the corresponding bonds trading at market price and delivering them to the mortgage banks. They can also refinance to another loan to pay for the existing loan, despite having longer pay terms. On the other hand, when interest rates fall, borrowers can refinance their fixed-rate mortgages (FRM) with adjustable-rate mortgages (ARM) and still earn capital gains.
A due on sale clause in a loan contract means that borrowers have to pay their loans in the event the property has to be sold. This clause isn’t attached in Danish mortgage loan contracts, as borrowers can transfer the remaining loan to the new owner, or can buy back the bonds. This is especially beneficial to borrowers who experience situations where house sales are involved.
This payment system discourages borrowers from defaulting their loans, as they remain liable for the payment of their loan if they default.
The market share of ARMs has risen quickly since 2000, especially during the period when interest rates were falling from 2003 to 2005. Only 9% of the total mortgage value was ARM in 2000, while 81% were FRMs. In 2006, the share of ARMs had risen to 52%, while the share of FRMs had shrunk to 44%.
When interest rates rose between January and October 2008, homeowners refinanced to pay their previous loans, reducing their remaining debt despite longer term payments. When interest rates began to drop in November, borrowers shifted to adjustable-rate mortgages (ARM). By end-2008, the FRM share further declined to 42%.
In 2009, homeowners are taking advantage by shifting from FRMs to ARMs. The first quarter saw more than 80% of homeowners who took new loans preferring ARMs over FRMs, according to a report by Morgenavisen Jyllands-Posten, a leading Danish newspaper. By the end of 2009, ARM share is expected to increase.
Around 75% of all residential property sales in Denmark are one-family houses. Sales of one-family houses declined 12.2% in 2006, and 2.9% in 2007. Sales of owner-occupied flats, the second most sold residential property category, decreased 17.8% in 2006, and 16.4% in 2007.
With homeowners expecting the economic situation to worsen, disposable income is either being saved or used for increased consumption in other areas, according to Realkreditrådet.
Residential completions dropped 15.8% in 2008 to 24,129 units, as finance providers were reluctant to finance residential projects, according to Sadolin and Albæk, a real estate consultancy firm.
Multi-dwelling house unit completions dropped most, falling by 35.9% from 2007, to 6,752.
Completions of detached and semi-detached houses declined by 4.8% and 7.6%, respectively, during the same period.
Issued construction permits declined in 2008 by 38% to 14,533, the lowest number of issued permits since 1996. Permits for multi-dwelling and semi-detached houses declined the most, declining by 54.4% and 52.1% respectively, while permits for detached houses declined by 30.6%.
In 2008, Denmark became one of the first countries in Europe to formally go into recession. The economy contracted by 0.8% in 2008 and by 5.7% in 2009. Boosted by government spending and the recovery of the global economy, Denmark’s GDP grew by around 1.6% in 2010 and by another 1.1% in 2011.
However, the economy contracted again by 0.5% in 2012, the worst economic performance in three years, according to Statistics Denmark. This is amidst high level of household indebtedness and a depressed housing market.
The Danish economy is expected to grow by about 0.5% to 1% in 2013, based on government estimates. Private consumption is projected to increase by 0.7% this year after growing by 0.5% in 2012 while spending on homes is expected to fall by 0.6% in 2013 after dropping by 9.8% last year, according to Danmarks Nationalbank, the country’s central bank.
Denmark’s budget deficit rose to 4.2% of GDP in 2012 from about 3.9% in 2011, mainly due to increased government spending aimed at addressing lower-than-expected economic growth.
At the height of the global crisis, the fiscal stimulus combined with bank bailouts pushed the budget deficit from a surplus of 3.4% of GDP in 2008 to a deficit of 2.7% of GDP in 2009 and 5.5% in 2010.
It is not all bad news. Denmark’s seasonally-adjusted unemployment rate dropped to 5.8% in March 2013, from 5.9% in February and 6% in January 2013, according to Statistics Denmark. The latest figure is the lowest since December 2009. The total number of unemployed persons fell by 2,300 to about 154,900 in March 2013.
In March 2013, the annual headline inflation was just 0.9%, the lowest level since September 2009, according to Statistics Denmark. From 2010 to 2012, the average annual inflation rate in the country stood at 2.5%.
Denmark’s central bank Danmarks Nationalbank slashed its key lending rate by 10 basis points to 0.2% in May 2013, in line with the ECB’s key rate cut to a record low 0.5%. The country’s central bank usually follows the moves of the ECB to keep its currency (the Danish Krone) stable. The Danish Krone was pegged to the euro at €1=DKK7.46038 with a 2.25% band.
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.
The result has been to discourage the private rental sector. More than half (51%) of the 2.5 million households in 2008 are owner-occupied. The rental market comprises about 47% of the housing stock, while other categories comprise the remaining 2%.
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). Approximately 60% of all private rented dwellings were built before 1940, and only about 11% were built after 1980. In fact, rather few new private rental dwellings are now being built.
Although there has been a slight decline in owner-occupancy in favor of social housing, this is due to the rise of single person households.
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.
One way to revive the housing market could be to deregulate the rental market. Rapid price increases in the past, combined with strict rent controls, have led to low rental yields in Denmark. Average rental yields in Copenhagen typically range from 4.2% to 5.5%, according to Global Property Guide research.
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