Danish house prices continue to rise, despite tighter lending regulations
Lalaine C. Delmendo | August 15, 2019
The price index of one-family houses in Denmark rose by a modest 3.28% (2.47% when adjusted for inflation) during 2018, after y-o-y increases of 4.01% in 2017, 3.53% in 2016, 6.29% in 2015 and 3.54% in 2014, according to Statistics Denmark. Though quarter-on-quarter, the price index dropped slightly by 0.46% (-0.14% inflation-adjusted) in Q4 2018.
This was supported by the Association of Danish Mortgage Banks (ADMB), which showed that prices continue rise for all property types and for almost all regions during 2018:
- The average price of owner-occupied flats rose by 3.5% y-o-y to DKK27,555 (EUR3,691) per square metre (sq. m).
- Detached/terraced house prices rose by 4.2% y-o-y to an average of DKK13,736 (EUR1,840) per sq. m.
- Holiday home prices rose by 1.6% y-o-y to an average of DKK14,863 (EUR1,991) per sq. m.
By region, during 2018:
- In the Capital region, i.e. Copenhagen and its hinterland, the average price of owner-occupied flats rose by 3% y-o-y to DKK34,989 (EUR4,687) per sq. m.
- In Zealand region, house prices rose by 4.6% y-o-y to an average of DKK17,042 (EUR2,283) per sq. m.
- In Southern Denmark, house prices surged 10.7% to an average of DKK16,617 (EUR2,226) per sq. m.
- In Central Denmark, house prices increased 4.1% y-o-y to DKK22,608 (EUR3,028) per sq. m.
- In North Zutland, house prices fell slightly by 0.1% y-o-y to an average of DKK17,217 (EUR2,306) per sq. m.
Demand is now falling. During 2018, the total number of registered sales for one-family houses fell by 1.2% to 48,065 units, in sharp contrast to a y-o-y growth of 12.4% in the previous year. Likewise, sales for owner-occupied flats dropped 7.8% y-o-y to 16,787 units in 2018, in contrast to a 5.8% increase in 2017.
Residential construction activity continues to fall, which partly explains the continued increase in prices despite weak demand. In 2018, permits fell by 14.6% y-o-y to just 22,619 units, following 15.8% decline in 2017, according to Statistics Denmark.
Effective January 1, 2018, the government introduced tighter lending regulations, in an effort to reduce the share of more risky interest rate and repayment-free mortgages on the overall mortgage lending portfolio of banks. Banks will be limited from offering housing loans that do not have fixed interest rates, or monthly installments. Moreover, the number of mortgages available to households seeking to borrow more than four times their income, or more than 60% of the value of the property will be heavily restricted.
"These are reasonable guidelines that should ensure that homeowners are more robust," said Lars Krull of Aalborg University.
The move is also supported by Nordea economist Jan Storup Nielsen, who believes that the move "represents a major departure from previous policies and will likely help reduce the risk of a new housing bubble."
In the past recent years, the International Monetary Fund (IMF) had been urging the Danish government to reverse its negative interest rates mandate and introduce new policies to avoid a disastrous housing bubble.
In 2018, total mortgage outstanding rose by 2.1% y-o-y to DKK2.76 trillion (EUR369.3 billion), according to the ADMB.
In 2018, Denmark's economy grew by an estimated 1.2%, a slowdown from GDP growth rates of 2.3% in 2017, 2% in 2016, and 1.6% in both 2014 and 2015, amidst economic slowdown in Europe, the country's biggest export market. The economy is expected to expand by 1.6% this year and by another 1.3% in 2020, according to the European Commission.
Copenhagen’s rental yields range from 4.84% to 5.31%
Residential property prices in Denmark have been stable during the past three years (2012-2014), according to StatBank Denmark. In Copenhagen, our research suggests that the price of apartments has remained stable, with maybe some upward price movement for the smallest apartments. Meanwhile, in Copenhagen, rents have also been stable.
The result is that rental yields on apartments in Copenhagen have hardly moved over the past two years. Apartments of 120 square metres (sq. m.) yield 4.84%. Apartments of 50 sq. m. yield 5.27%.
These are moderate yields.
Taxes are moderate in Denmark
Rental Income: Rental income subject to state income tax, from 8.08% to 15%, and municipal income tax at a flat rate of 24%. Landlords have two options when computing for taxable income: (a) itemized deductions, and (b) standard deduction to account for income-generating expenses.
Capital Gains: Capital gains from sale of immovable property in Denmark earned by nonresident owners are taxed at a special rate of 24%, because they do not pay any county income tax.
Inheritance: Inheritance of the immediate family (children, grandchildren, parents) is subject to total estate tax at a flat rate of 36.25%. No tax is levied on the spouse’s inheritance.
Residents: Income earned by residents is taxed at various progressive rates, up to around 55.60%. Tax on income consists of state tax, AM tax, municipal tax, and church tax.
Transaction costs are very low in Denmark
Roundtrip transaction costs in Denmark are among the lowest in Europe, at 1.23% to 3.23% of the property value. The greater part of the costs is accounted for by the real estate agent’s commission at 0.5% to 2%, usually paid by the seller.
Strongly pro-tenant laws in Denmark
Danish rental laws and practices are extremely pro-tenant.
Rent Control: There are five different forms of rent control in Denmark depending upon the age of the building and the system is very complex. However, rents on dwellings constructed after 1991 are exempt from rent control.
Legal Disputes: The system is confusing. “It is not possible for lay people to properly calculate the maximum rent applicable to a particular tenancy,’ notes the EUI report on Danish Landlord and Tenant law. “This is the cause of many legal disputes, which must be resolved by the judicial system.”
Economic slowdown, low unemploymentIn 2018, Denmark’s economy grew by an estimated 1.2%, a slowdown from GDP growth rates of 2.3% in 2017, 2% in 2016, and 1.6% in both 2014 and 2015, amidst economic slowdown in Europe, the country’s biggest export market. In addition, the economy is also negatively affected by a one-off transaction linked to the sale of a Danish patent in 2017.
In 2008, Denmark was one of the first countries in Europe to go into recession. The economy contracted by 0.5% in 2008 and by 4.9% in 2009. Prime minister Helle Thorning-Schmidt, a Social Democrat (2011-2015), adopted austerity measures that improved government finances, and the country recorded a public budget surplus of 1.1% of GDP in 2014, after several years of deficits. Mrs Thorning-Schmidt’s measures 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, and ironically adopted inflationary policies.
Spending increases in an effort to prop up the economy during the period resulted in a budget deficit of 1.5% of GDP in 2015 and 0.4% of GDP in 2016. In 2018, the country’s budget balance returned to a deficit of about 0.7% of GDP, after registering a surplus of 1% of GDP in 2017.
The country’s government debt declined to about 34.7% of GDP in 2018, from 35.3% of GDP in 2017 and 37.9% of GDP in 2016, according to the IMF. In fact, it was one of the lowest in the EU. Government debt is expected to fall further to 34% of GDP in 2019 and to 33.1% in 2020.
The economy is expected to expand by 1.6% this year and by another 1.3% in 2020, according to the European Commission.
Inflation stood at 1.2% in March 2019, up from 0.5% in the same period last year. Inflation is expected to be 1.2% this year before accelerating to 1.7% in 2020, according to the European Commission.
Denmark’s unemployment was 4% in February 2019, down from 4.3% a year earlier and far lower than the 7.8% jobless rate recorded in the euro area (EA19) over the same period, according to Statistics Denmark.
In February 2019, unemployment for men and women in Denmark stood at 3.9% and 4.1% respectively. Overall unemployment had averaged 4.7% from 2007 to 2018.