Denmark’s booming housing market a ‘cause for concern’ – DanmarksNationalBank
Lalaine C. Delmendo | August 06, 2021
Denmark’s house price rises continue to accelerate, raising worries among policymakers. “During the pandemic, the Danish housing market has been characterised by both high trading activity and rapidly rising prices,” said the DanmarksNationalBank in its H1 2021 Financial Stability report. “Sharp increases in housing prices increase the risk of subsequent price decreases.”
The price index of one-family houses in Denmark soared by 14% (12.1% when adjusted for inflation) in May 2021 from a year earlier, after y-o-y increases of 4.8% in 2020, 3% in 2019, 3.9% in 2018 and 4% in both 2016 and 2017, according to Statistics Denmark. It was the third consecutive month of double-digit increase and one of the highest y-o-y increases ever recorded.
Prices continued to rise for all property types and for almost all regions during the year to June 2021, according to the Association of Danish Mortgage Banks (ADMB):
- The average asking price on owner-occupied flats for sale rose by 11.6% y-o-y to DKK38,145 (EUR5,128) per square metre (sq. m).
- Detached/terraced house prices rose by 11.1% y-o-y to an average of DKK18,910 (EUR2,542) per sq. m.
- Holiday home prices rose strongly by 22.1% y-o-y to an average of DKK23,859 (EUR3,208) per sq. m.
By region, during the year to June 2021:
- In the Capital region, i.e. Copenhagen and its hinterland, the average asking price of owner-occupied flats soared by 14.4% y-o-y to DKK49,576 (EUR6,665) per sq. m.
- In North Jutland, house prices rose strongly by 11.8% y-o-y to an average of DKK22,929 (EUR3,082) per sq. m.
- In Central Denmark, house prices rose by 8.8% y-o-y to DKK30,984 (EUR4,165) per sq. m.
- In Southern Denmark, house prices increased 1.9% to an average of DKK22,070 (EUR2,967) per sq. m.
- In Zealand region, asking prices for owner-occupied flats fell slightly by 0.7% y-o-y to an average of DKK21,136 (EUR2,841) per sq. m.
Demand continues to rise rapidly despite the pandemic, buoyed by negative mortgage interest rates. In the first quarter of 2021, sales of detached/terraced houses rose by 40% to 13,632 units from a year earlier, following annual growth of 15.4% in 2020, according to ADMB. Likewise, sales of owner-occupied flats rose by 37% y-o-y to 4,980 units in Q1 2021 while holiday home sales almost doubled to 3,662 units over the same period.
To cool the housing market, the DanmarksNationalBank suggests higher downpayment and amortisation requirements for highly indebted homeowners. Danish households are the most indebted people in the OECD, with an average personal debt equivalent to 258.3% of net disposable income in 2020.
“With rapidly rising housing prices and an existing basis for further price increases, there is reason to look at a tightening of the lending rules to limit vulnerability to a subsequent drop in housing prices,” said the central bank. “At its next meeting, the Systemic Risk Council expects to recommend to the Danish Government that further measures be taken to limit continued risk build-up in the housing market.”
The Danish economy contracted by 3.3% y-o-y in 2020, the biggest decline since 2009, when the economy shrunk by 4.9% due to the global financial crisis, according to the International Monetary Fund (IMF). In Q1 2021, real GDP fell by another 0.8% y-o-y, after annual declines of 0.5% in Q4 2020, 2.2% in Q3 and 8% in Q2,largely due to declines in household spending.
The country’s Ministry of Finance projects the economy to grow by a modest 2.4% this year and by another 3.6% in 2022. The European Commission is more optimistic, estimating that the Danish economy will expand by 3% this year.
Housing boom and bust
Denmark has been through several vigorous boom-bust cycles. From Q1 2003 to Q2 2007, the national average house price rose 75.4%, or 63.6% in real terms (figures from the Association of Danish Mortgage Banks). Prices in the capital region rose by 88.3% (75.6% in real terms).Property prices peaked in Q2 2007.
Then from Q2 2007 to Q3 2009, property prices fell about 15.4% (-19.3% inflation-adjusted) due to the global financial meltdown. In the capital region the decline was 25.3% (-28.8% real). The regions that experienced the highest price rises during the boom generally had the biggest price falls.
From Q3 2009 to Q3 2010 there was a short-lived recovery. But property prices fell again by about 9% from Q4 2010 to Q4 2012, due to the eurozone debt crisis.
The housing market has improved gradually since then, with house prices rising by 1.38% (0.71% in real terms) in 2013 and by 1.83% (1.35% in real terms) in 2014. The Danish housing market strengthened in the following years, thanks to robust demand fuelled by negative interest rates.
Performance of the housing market since 2015:
- 2015: house prices were up by 6.57% (6.17% in real terms)
- 2016: up by 4.18% (3.8% in real terms)
- 2017: up by 5.19% (3.88% in real terms)
- 2018: up by 3.48% (2.67% in real terms)
- 2019: up by 3.9% (3.2% in real terms)
- 2020: up by 6.46% (5.98% in real terms)
Demand rising rapidly
In the first quarter of 2021, sales of detached/terraced houses rose strongly by 40% to 13,632 units from a year earlier, following annual growth of 15.4% in 2020, according to ADMB.
Likewise, sales of owner-occupied flats rose by 37% y-o-y to 4,980 units in Q1 2021 while holiday home sales almost doubled to 3,662 units over the same period.
Time-on-market to sell a residence has fallen for all property types:
- Detached/terrace house average days-on-market stood at 156 in Q1 2021, down from 174 a year earlier, according to the ADMB.
- Owner-occupied flat average days-on-market were 92 in Q1 2021, sharply down from 124 in Q1 2020.
- Holiday home average days-on-market were 192 in Q1 2021, sharply down from 290 a year earlier.
Residential construction activity depressed
Residential permits, starts, as well as housing under construction plummeted last year, due to coronavirus-related restrictions. On the other hand, residential completions continue to rise, which is not surprising as most of them were started before the pandemic.
- Residential construction permits fell by 40.8% y-o-y to just 21,050 units in 2020, following a 12.5% decline in 2019, according to Statistics Denmark.
- Starts plunged by 48.4% y-o-y to 18,016 units in 2020, after falling slightly by 1.5% in the previous year.
- Dwellings under construction fell sharply by more than 40% to 27,265 units in 2020 from a year earlier, in contrast to a 2.1% growth in the prior year.
- Completions rose by 7.3% y-o-y to 36,489 units in 2020, following annual growth of 18.2% in 2019.
In recent years, new designated development areas have been built close to the centre of Copenhagen.
- Ørestad - Between the city centre, the airport, and the Øresund Bridge, Ørestad is a new business and residential district measuring 3.1 million sq. m. The city’s main convention centre, some of the region’s largest hotels, universities, and multinational corporations are located in Ørestad. It is now home to around 10,000 residents.
- Carlsberg City District - Carlsberg, in the centre of Copenhagen, has new houses, schools and offices, mixed with historical buildings. Recent projects include Bohr’s Tower (88 apartments), Ottilia House (27 residences), Jacobsen House (exclusive residences).
- Nordhavn - Previously an industrial and commercial harbour, Nordhavn is being converted into a residential and commercial district. Schools, day care centres, and sport facilities are also being developed.
Other parts of Copenhagen which experienced an upsurge in construction before the pandemic include the southern part of Copenhagen Harbour, the eastern area of Amager, and the southwestern part of the Capital.
In 2021, about 48.3% of dwellings in Denmark were owner-occupied (or 1,328,114 units) while 50.8% were occupied by tenants (or 1,395,515 units), according to Statistics Denmark.
Mortgage rates remain negative
Mortgage interest rates in Denmark remain negative.
- The short-term mortgage rate averaged -0.5% in 2020, slightly down from -0.6% in 2019, -0.51% in 2018, -0.55% in 2017, -0.29% in 2016, -0.16% in 2015, 0.19% in 2014, 0.23% in 2013, and 0.47% in 2012, according to the ADMB.
- The long-term mortgage rate dropped to 1.15% in 2020, from 1.61% in 2019, 2.12% in 2018, 2.26% in 2017, 2.57% in 2016, 2.77% in 2015, 3.08% in 2014, 3.48% in 2013, and 3.67% in 2012.
During the first 29 weeks of 2021, the short-term mortgage rate averaged -0.5% while the long-term mortgage rate stood at 1.19%.
Danish mortgage market growing; borrowers shift to fixed-rate loans
The size of the Danish mortgage market was equivalent to 127.8% of GDP in 2020, up from 122.4% in 2019 but still down from 133.1% in 2009. Total mortgages outstanding have risen by an average of 2.5% annually from 2009 to 2020, after annual growth of 7.8% from 1998 to 2008.
In Q2 2021, total mortgage loans outstanding rose by 3.7% y-o-y to DKK 3 trillion (EUR403 billion), according to the Association of Danish Mortgage Banks. Over the same period:
- Fixed-rate mortgages loans: up strongly by 18.9% y-o-y to DKK1.41 trillion (EUR189.8 billion)
- Variable-rate mortgage loans: down 6.9% y-o-y to DKK1.59 trillion (EUR213.4 billion)
Danes are converting variable rate loans into fixed-rate. In Q2 2021, variable-rate mortgages accounted for 53% of total loans – down from 57% in 2020, 60.5% in 2019, 64% in 2018, 65.6% in 2017, 66.7% in 2016, 68.2% in 2015, 72.1% in 2014, 72.6% in 2013 and 73.2% in 2012. Fixed-rate loans now account for the remaining 47% of total mortgage loans.
Mortgage arrears remain low at 0.15% in Q1 2021, down from 0.16% 2020 and 0.24% in 2019, based on figures from ADMB. Likewise, the number of repossessed dwellings continue to drop to only 37 units in H1 2021, from 91 in H1 2020 and 138 in H1 2019.
High household debt poses a threat to financial stability
Danish households’ average personal debt is equivalent to 258.3% of net disposable income in 2020. But this is down from 293% in 2015, 306% in 2013, 320% in 2011, and 340% in 2009, according to the Organisation for Economic Cooperation and Development (OECD), and Denmark’s banking system remains well positioned and well capitalized.
Nevertheless Fitch Ratings notes that the country’s high household debt poses a threat to its stability. “Denmark’s household debt as a share of net disposable income is the highest amongst OECD countries, and remains an economic and financial stability risk in the event of a sustained labour market or house price sector shock.”
Mortgage debt accounts for about 80% of household debt, according to Fitch Ratings.
“High and increasing household debt amid accelerating housing valuations remains a key vulnerability,” said the IMF in its June 2021 country report.
DanmarksNationalBank, the country’s central bank, acknowledged the increased risks in housing lending of financial institutions in its H1 2021 Financial Stability report. “There are certain signs of increased risk-taking in the lending: In 2020, loans to highly indebted home buyers constituted a higher share of total new lending, especially in the City of Copenhagen and environs,” said the central bank.
One of the reasons for the recent increase in housing debt is high refinancing activity. “In 2020, about half of homeowners who refinanced their mortgage loans chose to increase their mortgage debt. Additional borrowing in connection with mortgage refinancing has, on average, increased these homeowners’ loan-to-value ratios, and they have only repaid other bank debt to a limited extent.”
As a result market liquidity in Denmark’s US$500 billion mortgage bond market, the world’s biggest, declined sharply last year due to an increase in both rates and risk premiums amidst the coronavirus crisis.
The risks associated with high household indebtedness are mitigated by macroprudential measures that have limited demand for high risk loans, and an increasing share of households with fixed rate mortgages – almost half of outstanding loans by end-2020.
In addition, most Danish households have sufficient income and a high level of assets to handle rising interest rates. During 2020, the average gross savings rate of Danish households increased to 18%, from 10% in 2019, despite the pandemic.
“The high gross debt of Danish households is matched by corresponding assets such as real estate and pension schemes. Nevertheless, large debt makes the Danish economy and financial stability vulnerable to shocks to the housing market,” said DanmarksNationalBank.
Stricter lending rules looming
In its H1 2021 Financial Stability report, the DanmarksNationalBank has suggested the imposition of higher downpayment and amortisation requirements for highly indebted homeowners to cool down the housing market and limit risky mortgage lending.
“Over a number of years, the authorities have introduced borrower-based requirements for credit institutions’ housing lending to curtail the riskiest borrowing,” said the central bank. “Experience shows that lending rules can contribute to limiting the extent of risky borrowing.”
Effective January 1, 2018, banks have been limited from offering housing loans that do not have fixed interest rates, or monthly installments. Moreover, mortgages available to households seeking to borrow more than four times their income, or more than 60% of the value of the property, are heavily restricted.
Rental yields moderate to good, despite a highly regulated market
Yields have recovered in Denmark in recent years, as rents have risen faster than house prices. Average gross 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%.
Nevertheless, few new private rental dwellings are now being built, largely because the private rental market is strongly pro-tenant (see Landlord and Tenant section).
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). Otherwise rents are non-responsive to market forces because there are five different forms of rent control, depending upon the age of the building. There is also a huge social rental sector.
Further discouraging landlordism, owner-occupied dwellings 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.
Denmark is not open to foreign buyers
Despite Denmark’s liberal reputation, it is not easy to acquire property here.
Nonresidents may not purchase real property here unless the person:
- Has previously resided in Denmark for at least five years;
- Is an EU national working in Denmark; or,
- If a non-EU national, has a valid residence or business permit.
Even tighter restrictions on foreign ownership exist particularly for summer homes 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.
Economy to grow modestly, unemployment falling again
The Danish economy contracted by 3.3% y-o-y in 2020, the biggest decline since 2009 when the economy shrunk by 4.9% due to the global financial crisis, according to the International Monetary Fund (IMF). Then in Q1 2021, real GDP fell by another 0.8% y-o-y, following annual declines of 0.5% in Q4 2020, 2.2% in Q3 and 8% in Q2,largely due to the fall in household spending.
Despite the weak start this year, the country’s Ministry of Finance projects the economy to grow by a modest 2.4% this year and by another 3.6% in 2022. The European Commission is even more optimistic, which estimates the Danish economy to expand by 3% this year.
“Together with the vaccine rollout and the gradual reopening, we now see the result of the government and the Folketing (Danish Parliament) holding the hand of Danish employees and companies with a historic fiscal policy effort throughout the crisis," said Minister for Finance Nicolai Wammen.
Before the pandemic, 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.
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. Last year, the government estimated that the public sector balance registered a loss of about DKK25.6 billion (EUR3.44 billion), as a result of increased financing needs related to COVID-19.
As percent of GDP, Denmark recorded a deficit of 1.1% in 2020, in contrast to surpluses of 3.8% of GDP in 2019, 0.7% in 2018 and 1.8% in 2017, according to figures from Statistics Denmark.
The country’s government debt surged to 42.2% of GDP in 2020, sharply up from 33.9% of GDP in 2019.
Inflation stood at 1.7% in June 2021, up from just 0.3% in the same period last year, according to Statistics Denmark. Inflation is expected to accelerate to 1.5% this year, the highest level since 2012, according to the European Commission.
The labour market is now gradually returning to normal. Denmark’s unemployment stood at 3.5% in June 2021, down from 5% in June 2020 and now at par with its 2019 pre-pandemic level, according to figures released by Statistics Denmark.
In June 2021, the jobless rate for men and women in Denmark stood at 3.4% and 3.7% respectively. Overall unemployment rose to 4.5% last year, from an annual average of 3.9% from 2016 to 2019.
- Housing (Statistics Denmark): https://www.dst.dk/en/Statistik/emner/levevilkaar/boligforhold
- Prices and Consumption (Statistics Denmark): https://www.statbank.dk/statbank5a/SelectTable/Omrade0.asp?SubjectCode=06&ShowNews=OFF&PLanguage=1
- Housing statistics (The Association of Danish Mortgage Banks): https://finansdanmark.dk/tal-og-analyser/boligstatistik/
- Labour, Income and Wealth (Statistics Denmark): https://www.statbank.dk/statbank5a/default.asp?w=1280
- Registered unemployment (Statistics Denmark): https://www.dst.dk/en/Statistik/emner/arbejde-indkomst-og-formue/arbejdsloeshed/registreret-ledighed
- Economic forecast for Denmark (European Commission): https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/denmark/economic-forecast-denmark_en
- Consumer price index (Statistics Denmark): https://www.dst.dk/en/Statistik/emner/priser-og-forbrug/forbrugerpriser/forbrugerprisindeks
- Government finances (Statistics Denmark): https://www.dst.dk/en/Statistik/emner/nationalregnskab-og-offentlige-finanser/offentlige-finanser
- Copenhagen’s rental yields range from 4.84% to 5.31% (Global Property Guide): https://www.globalpropertyguide.com/Europe/Denmark/Rental-Yields
- Arrears (The Association of Danish Mortgage Banks): http://financedenmark.dk/hard-figures/housing-statistics/arrears/
- Household debt (Organisation for Economic Co-operation and Development): https://data.oecd.org/hha/household-debt.htm
- Household wealth and debt (DanmarksNationalBank): https://www.nationalbanken.dk/en/knowledge_bank/themes/Pages/Household-wealth-and-debt.aspx
- Fitch Affirms Denmark at ´AAA´; Outlook Stable (Fitch Ratings): https://www.fitchratings.com/research/sovereigns/fitch-affirms-denmark-at-aaa-outlook-stable-26-02-2021
- Denmark: 2021 Article IV Consultation-Press Release; Staff Report; and Staff Supplement (International Monetary Fund): https://www.imf.org/en/Publications/CR/Issues/2021/06/14/Denmark-2021-Article-IV-Consultation-Press-Release-Staff-Report-and-Staff-Supplement-50207
- Danish mortgage bond liquidity briefly impacted by covid-19 (DanmarksNationalBank): https://www.nationalbanken.dk/en/publications/Documents/2020/11/ANALYSIS%20No.%2022_Danish%20mortgage%20bond%20liquidity%20briefly%20impacted%20by%20covid-19.pdf
- Financial Stability – 1st Half 2021 Build-up of risks in credit institutions (DanmarksNationalBank): https://www.nationalbanken.dk/en/publications/Documents/2021/05/ANALYSIS_No.%2012_Financial%20Stability_1st%20half%202021.pdf
- Mortgage rates (Finance Denmark): http://financedenmark.dk/hard-figures/housing-statistics/mortgage-rates/