Slowing economic growth
Lalaine C. Delmendo | February 23, 2022
Denmark's housing market is noticeably cooling, amidst rising interest rates coupled with slowing economic growth. Demand is now plunging. Residential construction activity remains depressed. And, house price growth is decelerating.The price index of one-family houses in Denmark rose by 5.5% in Q1 2022, a slowdown from y-o-y increases of 8.1% in Q4 2021, 10.7% in Q3, 13.5% in Q2, and 12.3% in Q1, based on figures released by Statistics Denmark. When adjusted for inflation, house prices increased by a miniscule 0.6%.
On a quarterly basis, house prices rose by 1.1% in Q1 2022 but actually declined by 1.1% in real terms.
Prices continued to rise for almost all regions and for all property types in Q1 2022, albeit at a much slower pace as compared to a year ago, according to the Association of Danish Mortgage Banks (ADMB).
By region:
- In the Capital region, i.e. Copenhagen and its hinterland, the average asking price of owner-occupied flats rose by 8.4% (3.4% inflation-adjusted) y-o-y to DKK44,945 (€6,044) per square metre (sq. m.). This was a slowdown from the prior year's 14.3% price growth.
- In Zealand region, asking prices for owner-occupied flats rose slightly by 1.8% (-3% inflation-adjusted) y-o-y to an average of DKK20,272 (€2,726) per sq. m. – a sharp slowdown from an 8.4% increase in Q1 2021.
- In North Jutland, house prices increased 3% (-1.8% inflation-adjusted) y-o-y to an average of DKK19,213 (€2,583) per sq. m.
- In Central Denmark, house prices rose by 3.8% (-1% inflation-adjusted) y-o-y to DKK27,284 (€3,669) per sq. m.
- In Southern Denmark, house prices increased 5.1% (0.2% inflation-adjusted) to an average of DKK19,068 (€2,564) per sq. m.
By property type, during the year to Q1 2022:
- The average transaction price on owner-occupied flats for sale rose by 7.1% (2.1% inflation-adjusted) y-o-y to DKK34,370 (€4,622) per sq. m.
- Detached/terraced house prices rose by 6.2% (1.2% inflation-adjusted) y-o-y to an average of DKK16,705 (€2,246) per sq. m.
- Holiday home prices increased 5.8% (0.8% inflation-adjusted) y-o-y to an average of DKK20,148 (€2,709) per sq. m.
Demand is falling sharply. In the first quarter of 2022, sales of detached/terraced houses plunged 29% to 10,254 units from a year earlier, following annual growth of 6% in 2021 and 15.2% in 2020, according to ADMB. Likewise, sales of owner-occupied flats fell by 27.8% y-o-y to 3,916 units in Q1 2022 while holiday home sales plummeted by 57.4% to 1,559 units over the same period.
The housing market will continue to slow in the medium-term, amidst rising cost of borrowing and surging inflation. Based on the recent forecast released by Danish bank Handelsbanken, property prices in the country will fall by 10% to 15% by end-2023.
“We expect that the many headwinds for the housing market will lead to price drops for the country as a whole, and these will become clearer after the summer,” said Handelsbanken's senior economist Jes Asmussen. “And we would certainly not rule out such marked price drops in the most expensive areas like the apartment market in Copenhagen, which will also be impacted by a property tax reform that takes effect in 2024.”
The Danish economy grew by 4.9% y-o-y in 2021, fully offsetting the 2% contraction seen in 2020, mainly driven by a rebound in domestic demand and strong investment, according to the European Commission (EC).
Despite strong start this year, with a registered real GDP growth rate of 6.2% y-o-y in Q1 2022, the country's economic growth is expected to slow to a modest 3.5% this year, mainly due to adverse impact of the Russian invasion of Ukraine, as well as the continued pandemic-related uncertainty, according to the Ministry of Finance. The IMF is even more pessimistic, projecting an economic growth of 2.3% for the full year of 2022.
Analysis
of Denmark Residential Property Market »
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 0% 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 52.06%. 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 growth slows, inflation accelerates
The Danish economy grew by 4.9% y-o-y in 2021, fully offsetting the 2% contraction seen in 2020, mainly driven by a rebound in domestic demand and strong investment, according to the European Commission (EC).“The rebound in activity was led by strong domestic demand. Private consumption normalized amid easing of containment measures. Investment remained solid as economic prospects brightened. Public consumption also had a positive impact as the pandemic support continued,” said the IMF in its June 2022 Article IV Consultation with Denmark.
Despite strong start this year – registering a real GDP growth rate of 6.2% y-o-y in Q1 2022 – the country’s economic growth is expected to slow to a modest 3.5% this year, mainly due to adverse impact of the Russian invasion of Ukraine, as well as the continued pandemic-related uncertainty, according to the Ministry of Finance. The IMF is even more pessimistic, projecting an economic growth of 2.3% for the full year of 2022.
“The activity in the Danish economy has been remarkably high. Russia’s invasion of Ukraine will, however, have inevitable consequences for both the global economy and dampen the increase in economic activity at home,” said the Ministry of Finance.
“The greatest and most direct effect on the Danish economy is through higher prices on energy and other raw materials. Higher prices weaken the purchasing power of households and increases costs for businesses. This will affect Danish exports through lower growth on export markets. Greater uncertainty can also affect the economy if business investments are postponed and consumers show restraint. Consumer confidence has fallen considerably.”
Prior to the pandemic and now the Ukraine crisis, the Danish economy has been expanding by an average of 2.7% annually from 2015 to 2019, up from an annual average growth of 1.2% in 2010-14.
Government finances is gradually improving again. As percent of GDP, Denmark recorded a surplus of 2.3% in 2021, following a deficit of 0.2% in 2020 and surpluses of 4.1% in 2019 and 0.8% in 2018, according to figures from Statistics Denmark.
The country’s government debt stood at 36.7% of GDP in 2021, down from 42.1% in 2020 but still up from 33.6% in 2019.
Inflation surged to 8.7% in July 2022, sharply up from 1.6% in July 2021, according to Statistics Denmark. Inflation is expected to accelerate to 7.5% this year, sharply up from just 1.9% in 2021 and 0.3% in 2020, and the highest level in 40 years, according to the European Commission.
The labour market remains tight. Denmark’s unemployment stood at 2.4% in June 2022, down from 3.5% in June 2021 and 5% in June 2020, according to figures released by Statistics Denmark. Over the same period, the jobless rate for men and women in Denmark stood at 2.1% and 2.8% respectively. Overall unemployment averaged 6.3% in 2011 to 2021.