Danish housing market remains healthy
Lalaine C. Delmendo | August 12, 2020
The price index of one-family houses in Denmark rose by 3.04% (2.41% when adjusted for inflation) during the year to Q1 2020, after y-o-y increases of 3.64% in Q4 2019, 3.53% in Q3, 2.5% in Q2 and 2.26% in Q1, according to Statistics Denmark. Quarter-on-quarter, the price index increased slightly by 0.63% (0.44% inflation-adjusted) in Q1 2020.
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 the year to Q1 2020:
- The average price of owner-occupied flats rose by 5.6% y-o-y to DKK29,089 (EUR3,908) per square metre (sq. m).
- Detached/terraced house prices rose by 4.1% y-o-y to an average of DKK14,170 (EUR1,904) per sq. m.
- Holiday home prices rose strongly by 7% y-o-y to an average of DKK15,927 (EUR2,140) per sq. m.
By region, during the year to Q1 2020:
- In the Capital region, i.e. Copenhagen and its hinterland, the average price of owner-occupied flats rose by 4.8% y-o-y to DKK36,714 (EUR4,932) per sq. m.
- In Zealand region, house prices surged by 10% y-o-y to an average of DKK18,431 (EUR2,476) per sq. m.
- In Southern Denmark, house prices increased 5.5% to an average of DKK17,488 (EUR2,349) per sq. m.
- In Central Denmark, house prices rose strongly by 8.3% y-o-y to DKK24,473 (EUR3,288) per sq. m.
- In North Jutland, house prices rose by 7.2% y-o-y to an average of DKK18,000 (EUR2,418) per sq. m.
Demand remains robust. In Q1 2020, sales of detached/terraced houses rose by 4.6% to 9,789 units from a year earlier, according to the ADMB. Likewise, sales of owner-occupied flats rose by 8.4% y-o-y to 3,761 units in Q1 2020 while holiday home sales surged 21.3% to 1,899 units over the same period.
The mortgage market is also healthy, judging by the low default rate. Mortgage arrears stood at 0.24% in 2019, slightly up from the previous year's 0.2%. On the other hand, the number of repossessed dwellings dropped by almost 30% y-o-y to just 236 units in 2019 - the lowest level since 2007.
The Danish economy grew by a modest 2.4% last year, at par with the annual average growth of 2.3% from 2014 to 2018. However in Q1 2020, the economy contracted by 0.2% from a year, amidst the coronavirus outbreak. On a quarterly basis, the economy shrank by 2% in Q1 2020, the first quarterly contraction since Q4 2017, according to Statistics Denmark.
The economy is projected to decline by 5.2% this year before bouncing back with 4.3% growth in 2021, based on the estimates released by 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, increased unemploymentThe Danish economy grew by a modest 2.4% last year, at par with the annual average growth of 2.3% from 2014 to 2018. In June 2019, the Social Democrats regained power in general elections under the leadership of MetteFrederiksen, Denmark’s youngest prime minister at the age of 41. Frederiksen campaigned on a combination of traditional centre-left calls for stronger welfare policies, combined with tougher immigration rules.
However in Q1 2020, the economy contracted by 0.2% from a year earlier, in stark contrast to annual expansions of 2.1% in Q4 2019, 2.6% in both Q2 and Q3 and 2% in Q1, amidst the coronavirus outbreak. On a quarterly basis, the economy shrank by 2% in Q1 2020, the first quarterly contraction since Q4 2017, according to Statistics Denmark.
“The boom in the Danish economy has come to an abrupt end in early 2020,” said the Danish central bank. “The outbreak of the coronavirus and the measures implemented to contain its spread have led to a sharp contraction in economic activity.”
The central bank projects the Danish economy to contract between 3% and 10% in 2020. This was in line with the European Commission’s forecast, which estimates the Danish economy to decline by 5.2% this year before bouncing back with a 4.3% growth in 2021.
Denmark’s public finances have improved significantly in recent years, with surpluses of DKK33.1 billion (EUR4.45 billion) in 2017, DKK10.7 billion (EUR1.44 billion) in 2018 and DKK84.9 billion (EUR11.41 billion) in 2019. However this year, the government expects the public sector balance to register a significant loss of about DKK165 billion (EUR22.17 billion) to DKK 197 billion (EUR26.47 billion), after DanmarksNationalBank estimated that about DKK 250 billion (EUR33.59 billion) is needed to address the coronavirus crisis.
As a result, Denmark is expected to record a budget deficit of around 6.5% of GDP this year under the most optimistic scenario, in contrast to surpluses of 3.7% in 2019, 0.5% in 2018 and 1.5% in 2017.
The country’s government debt stood at about 33.2% of GDP in 2019, down from 33.9% of GDP in 2018 and the lowest level since 2007, according to Statistics Denmark. However as a result of increased financing needs related to COVID-19, government debt is expected to increase to more than 40% of GDP this year.
Inflation stood at 0.3% in June 2020, down from 0.6% in the same period last year, based on figures from Statistics Denmark. Inflation is expected to slow to 0.3% this year before accelerating to 1.2% in 2021, according to the European Commission.
Denmark’s unemployment stood at 5.2% in May 2020, up from 5% in the previous month and from just 3.4% a year earlier, according to Statistics Denmark.
In May 2020, the jobless rate for men and women in Denmark stood at 5.1% and 5.3% respectively. Overall unemployment had averaged 3.9% from 2016 to 2019.