Danish housing market remains healthy
Lalaine C. Delmendo | August 12, 2020
Negative mortgage interest rates! Not surprisingly, Danish house prices continue to rise, with strong demand.
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.
Housing boom and bust
Denmark has been through several vigorous boom-bust cycles. Property prices in Denmark peaked in Q2 2007, after huge rises during 2003-2007. 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).
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 improved gradually since, 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)
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.
Demand remains robust
Demand remains strong. In the first quarter of 2020, sales of detached/terraced houses rose by 4.6% to 9,789 units from a year earlier, following annual growth of 2.1% in 2019, 0.9% in 2018 and 10% in 2017, 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.
Time-on-market to sell a residence varies depending on the property type:
- Detached/terrace house average days-on-market stood at 174 in Q1 2020, up from 169 in the previous quarter but down from 179 a year earlier, according to the ADMB.
- Owner-occupied flat average days-on-market were 122 in Q1 2020, up from 120 days in Q4 2019 and 116 days in the same quarter last year.
- Holiday home average days-on-market were 290 in Q1 2020, up from 268 days in Q4 2019 but down from 314 days a year earlier.
Residential construction activity weakens
Residential completions increased in 2019, while permits, starts, and under construction all fell:
- Completions rose by 17% y-o-y to 33,232 units in 2019, following annual growth of 11.7% in 2018, 20.9% in 2017 and 40% in 2016, according to Statistics Denmark.
- Starts plunged by 30.8% y-o-y to 21,218 units in 2019, after increasing by 7.2% in the previous year.
- Dwellings under construction plunged by more than 30% to 27,807 units in 2019 from a year earlier, in contrast to a 6.1% growth in the prior year.
- Residential construction permits fell by 27.8% y-o-y to just 26,313 units in 2019, in contrast to a 20.2% growth in 2018.
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 in recent years include the southern part of Copenhagen Harbour, the eastern area of Amager, and the southwestern part of the Capital.
In 2020, about 49% of dwellings in Denmark were owner-occupied (or 1,326,304 units) while 51% were occupied by tenants (or 1,380,100 units), according to Statistics Denmark.
Mortgage rates below zero
Mortgage interest rates remain negative.
- The short-term mortgage rate averaged -0.6% in 2019, slightly down from -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 1.61% in 2019, from 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 30 weeks of 2020, the short-term mortgage rate averaged -0.48% while the long-term mortgage rate fell further to 1.25%.
The Danish mortgage market looks healthy, judging by the low default rate
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.
Mortgage arrears remain low at 0.24% in 2019 but slightly up from the previous year’s 0.2%, based on figures from ADMB. Likewise, the number of repossessed dwellings dropped by almost 30% y-o-y to just 236 units in 2019 - the lowest level since 2007.
Danes are converting variable rate loans into fixed-rate. In Q2 2020, variable-rate mortgages accounted for 59% of total loans – down from 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 accounted for the remaining 41% of total mortgage loans.
The size of the Danish mortgage market was equivalent to 124.4% of GDP in 2019, down from 133.1% in 2009. Total mortgages outstanding have risen by an average of 2.47% annually from 2009 to 2019, after annual growth of 7.8% from 1998 to 2008.
High household debt not a threat to financial stability, says Danmarks NationalBank
The Danes remain the most indebted people in the OECD. Danish households’ average personal debt currently equals 282% of net disposable income, 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).
High debts can put a strain on household finances, thereby negatively affecting the borrowers’ ability to satisfy their loan repayments. Worse, any rise in interest rates will further increase household burden.
Despite this, Danish households’ substantial debt is not a serious threat to financial stability, based on a report published by Danmarks NationalBank. Most Danish households have sufficient income to handle rising interest rates.
“The vast majority of households with high debt levels are financially robust, and as far as mortgage debt is concerned, the repayment ability of households has proved to be robust,” says Danmarks NationalBank.
The key is the high level of Danes’ assets. Danes borrow a lot, but also own a lot. “In line with the trend in most of Denmark’s neigbouring countries and other advanced economies, the value of the assets held by Danish households – their homes, equities, pension savings, bank deposits, etc. – has risen by more than their debt over the last 15-20 years,” notes Danmarks NationalBank. “In an international comparison, Danish households’ net wealth relative to disposable income is at an average level.”
This was supported by Danske Bank, the country’s largest bank, which said that Danish households are resilient, as their high debt levels are balanced by large assets.
"Debt accumulation is largely a consequence of significant gross pension savings combined with a low-cost and flexible mortgage system. Therefore, one can question whether the significant gross debt is a problem, or whether the discussion is based solely on the Danish economy being different from those of other countries," said the Danske Bank.
"Net financial assets have reached 163% of nominal GDP - the highest level ever and almost twice as high as 17 years ago. Including the value of houses, the household sector’s net assets amount to 320% of GDP."
And in fact, Denmark’s US$500 billion mortgage bond market, the world’s biggest, has shown resilience despite the coronavirus crisis that has swamped Europe’s capital markets.
“No Danish mortgage bank has ever defaulted on a covered bond,” said Finance Denmark. “There is one example of late payment back in the 1930s, however.”
Despite the central bank’s assurance, some remain worried. Danes are paying down mortgages at a rate of only 2% a year on average, and their monthly payments rise sharply when the interest-only periods end (typically ten years into the loan).
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.
Economic slowdown, increased unemployment
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. In June 2019, the Social Democrats regained power in general elections under the leadership of Mette Frederiksen, 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 Danmarks NationalBank 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.
- House Price Statistics (The Association of Danish Mortgage Banks): http://financedenmark.dk/hard-figures/housing-statistics/house-price-statistics/
- Arrears (The Association of Danish Mortgage Banks): http://financedenmark.dk/hard-figures/housing-statistics/arrears/
- Repossessed homes (The Association of Danish Mortgage Banks): http://financedenmark.dk/hard-figures/housing-statistics/repossessed-homes/
- Mortgage Rates (The Association of Danish Mortgage Banks): http://financedenmark.dk/hard-figures/housing-statistics/mortgage-rates/
- Official interest rates (Danmarks NationalBank): https://www.nationalbanken.dk/en/marketinfo/official_interestrates/Pages/Default.aspx
- Construction (Statistics Denmark): https://www.dst.dk/en/Statistik/emner/erhvervslivets-sektorer/byggeri-og-anlaeg/byggevirksomheden
- Housing (Statistics Denmark): https://www.dst.dk/en/Statistik/emner/levevilkaar/boligforhold
- Banking and mortgage lending, balances (Danmarks NationalBank): https://nationalbanken.statbank.dk/902
- Copenhagen’s rental yields range from 4.84% to 5.31% (Global Property Guide): https://www.globalpropertyguide.com/Europe/Denmark/Rental-Yields
- Danish households are resilient despite record debt levels (Danske Bank): https://danskebank.com/news-and-insights/news-archive/insights/2018/28112018
- Household wealth and debt (Danmarks NationalBank): https://www.nationalbanken.dk/en/publications/themes/Pages/Household-wealth-and-debt.aspx
- Household debt (Organisation for Economic Co-operation and Development): https://data.oecd.org/hha/household-debt.htm
- Danish mortgage bonds prove resilient yet again (International Investment): https://www.internationalinvestment.net/news/4012608/danish-mortgage-bonds-prove-resilient
- 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
- World Economic Outlook Database, April 2020 (International Monetary Fund): https://www.imf.org/external/pubs/ft/weo/2020/01/weodata/index.aspx
- 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
- Boom in Denmark´s economy may be replaced by 10% contraction, central bank says (Reuters): https://www.reuters.com/article/us-health-coronavirus-denmark-cenbank/boom-in-denmarks-economy-may-be-replaced-by-10-contraction-central-bank-says-idUSKBN21J4TG
- Quarterly National Accounts (Statistics Denmark): https://www.dst.dk/en/Statistik/emner/nationalregnskab-og-offentlige-finanser/kvartalsvist-nationalregnskab
- Consumer price index (Statistics Denmark): https://www.dst.dk/en/Statistik/emner/priser-og-forbrug/forbrugerpriser/forbrugerprisindeks