Danish house prices continue to surge!
Lalaine C. Delmendo | June 09, 2018
The price index of owner-occupied flats in Denmark rose by 7.88% (7.25% when adjusted for inflation) during the year to February 2018, an acceleration from last year´s growth of 6.87% (5.81% when adjusted for inflation), according to Statistics Denmark.
- The average price of owner-occupied flats surged 8.5% y-o-y to DKK26,630 (EUR3,575) per square metre (sq. m).
- Detached/terraced house prices rose by 5.3% y-o-y to an average of DKK13,191 (EUR1,771) per sq. m.
- Holiday home prices rose by 6.4% y-o-y to an average of DKK14,546 (EUR1,953) per sq. m.
By region, during 2017:
- In the Capital region, i.e. Copenhagen and its hinterland, the average price of owner-occupied flats rose by 10.4% y-o-y to DKK34,130 (EUR4,582) per sq. m.
- In Zealand region, house prices rose by 1o.3% y-o-y to an average of DKK16,319 (EUR2,191) per sq. m.
- In Southern Denmark, house prices increased 6.2% to an average of DKK15,086 (EUR2,025) per sq. m.
- In Central Denmark, house prices increased 4.1% y-o-y to DKK21,410 (EUR2,874) per sq. m.
- In North Zutland, house prices rose modestly by 2.9% y-o-y to an average of DKK16,910 (EUR2,270) per sq. m.
Demand is rising strongly. In 2017, registered sales for one-family houses increased 9.7% y-o-y to 47,444 units while sales for owner-occupied flats rose by 4.5% y-o-y to 17,977 units, according to Statistics Denmark.
Denmark is not open to foreign buyers
Despite Denmark´s association with liberalism, 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.
There are some special restrictions on foreign ownership in some areas, especially when buying summer holiday homes. This is particularly prevalent 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.
The housing market is in fine shape
"The housing market is in fine shape, with prices rising across most of the county - and the outlook is for this to continue, supported by general economic growth and rising household income," said Danske Bank in its March 2018 report. "Relatively few properties for sale, short sales times and just modest price discounts support the picture of this being a seller´s market." However, house price rises are projected to moderate during the remainder of the year, amidst tighter lending standards.
Weak construction activity supports the continued rise in house prices. In 2017, residential construction permits fell by 35.2% y-o-y to just 18,151 units, in sharp contrast to annual growths of 15.8% in 2016, 39.7% in 2015 and 41.1% in 2014.
In Q1 2018, total mortgage outstanding rose by 2.4% y-o-y to DKK2.7 trillion (EUR363 billion), according to the Association of Danish Mortgage Banks (ADMB).
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 2017, Denmark´s economy grew by 2.2% - the highest growth since 2006. The economy is expected to expand by 1.8% this year and by another 1.9% in 2019, according to the European Commission.
Mortgage rates below zero
Mortgage interest rates continue to fall. The short-term mortgage rate averaged -0.55% in 2017, down from -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. Likewise, the long-term mortgage rate also dropped to 2.26% in 2017, from 2.57% in 2016, 2.77% in 2015, 3.08% in 2014, 3.48% in 2013, and 3.67% in 2012.
Danmarks NationalBank´s interest rate on certificates of deposit remained unchanged at -0.65%, after an increase of 10 basis points in January 2016. The lending rate, discount rate and the current account rate have been unchanged at 0.05%, 0%, and 0%, respectively.
During the first 13 weeks of 2018, the short-term mortgage rate was at an average of -0.54% while the long-term mortgage rate dropped to 2.2%.
The Danish mortgage market looks healthy, judging by the low default rate
The size of the mortgage market was equivalent to 126% of GDP in 2017, down from 133.1% in 2009. Total mortgages outstanding have risen by just an average of 2.4% annually from 2009 to 2017, after annual growth of 7.8% from 1998 to 2008.
Mortgage arrears fell to an average of 0.2% in 2017, the lowest level since 2007, based on figures from ADMB. Likewise, the number of repossessed dwellings dropped 32.4% y-o-y to just 94 units in Q1 2018 - the lowest level in almost a decade.
High household debt not a threat to financial stability, says Danmarks NationalBank
While household debt has continuously fallen in the past eight years, the Danes remain the most indebted people in the OECD. Danish households´ average personal debt equals 285% of GDP, 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).
Huge 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, according to 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.
This was supported by Danske Bank, the country´s largest bank, which said that Danish households are resilient.
"The significant gross debt in Danish households is financed domestically and 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."
Despite the central bank´s assurance, others remain worried. No less than 45% of Danish mortgages have long interest-only periods in Q1 2018, up from only 10% in 2004. Adjustable-rate mortgages were 65% of all mortgages in Q1 2018, up from 38% a decade ago. 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).
Denmark´s US$500 billion mortgage bond market, the world´s biggest, might be heading for a "potential crisis" if interest rates substantially increase, some rating companies worry. The share of bonds with maturities of less than five years has increased to 63% in Q1 2018 from 47.5% in 2008, according to the Association of Danish Mortgage Banks (ADMB). The mismatch means that some bonds must be rolled over each year.
Housing boom and bust
Denmark has been through several vigorous boom-bust cycles recently. 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).
- 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.
- From Q4 2010 to Q4 2012 property prices fell by about 9%, due to the eurozone debt crisis.
Performance of the housing market since 2012:
- 2013: up by 1.38% (0.71% in real terms)
- 2014: up by 1.83% (1.35% in real terms)
- 2015: up by 6.57% (6.17% in real terms)
- 2016: up by 4.18% (3.8% in real terms)
- 2017: up by 5.28% (3.97% in real terms)
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.
Demand is rising
Demand is rising strongly. During 2017, sales of one-family houses increased 9.7% while owner-occupied flat sales rose 4.5%, according to Statistics Denmark.
Time-on-market to sell a house continues to fall:
- Detached/terrace house average days-on-market decreased to 176 in Q4 2017, from 195 in Q4 2016 and 204 days in Q4 2015.
- Owner-occupied flat average days-on-market were 105 in Q4 2017, down from 116 days in Q4 2016 and 115 days in Q4 2015.
- Holiday home average days-on-market were 315 in Q4 2017, down from 317 days in Q4 2016 but up from 301 days in Q4 2015.
Residential construction activity slowing
Residential construction permits, starts, and under construction all fell in 2017:
- Residential construction permits fell by 35.2% y-o-y to just 18,151 units in 2017, in sharp contrast to annual growth of 15.8% in 2016, 39.7% in 2015 and 41.1% in 2014, according to Statistics Denmark.
- Starts plunged by 49% y-o-y to 12,479 units in 2017, in contrast with y-o-y rises of 20% in 2016, 20.3% in 2015 and 49.2% in 2014.
- Dwellings under construction dropped 35.5% to 18,901 units in 2017 from a year earlier, in contrast with y-o-y rises of 14.3% in 2016, 27% in 2015, and 7.3% in 2014.
- Completions rose by 9.9% y-o-y to 22,890 units in 2017.
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. Current 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 2017, about 49.4% of dwellings in Denmark were owner-occupied (or 1,314,900 units) while 50.1% were occupied by tenants (or 1,332,743 units).
Higher economic growth, improving finances
In 2017, Denmark´s economy grew by 2.2%, an improvement from GDP growth rates of 2% in 2016, 1.6% in both 2014 and 2015, 0.9% in 2013, and 0.2% in 2012, amidst robust domestic demand, according to the European Commission. In fact, it was the highest growth since 2006.
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 over the past two years in an effort to prop up the economy resulted in a budget deficit of 1.5% of GDP in 2015 and 0.4% of GDP in 2016. However in 2017, the country´s budget balance returned to a surplus of 1% of GDP.
The country´s government debt also declined to about 36.4% of GDP in 2017, from 37.9% of GDP in 2016 and one of the lowest in the EU, according to Eurostat. Government debt is expected to fall further to 33.6% of GDP in 2018 and to 32.3% in 2019.
The economy is expected to expand by 1.8% this year and by another 1.9% in 2019, according to the European Commission.
In March 2018, inflation stood at 0.5%, the lowest level since December 2016. Inflation is expected to be 0.8% this year before accelerating to 1.4% in 2019, according to the European Commission.
Denmark´s unemployment was 4.2% in March 2018, down from 4.3% in the previous month and from 4.5% a year earlier, according to Statistics Denmark. Over the same period, unemployment for men and women stood at 4.1% and 4.2% respectively. Overall unemployment had averaged 4.8% from 2007 to 2017.