Sharp falls in prices in Denmark

After several years of rapid prices increases, most residential property prices in Denmark peaked in 2006, and are now falling sharply.

The national index for owner-occupied flats fell 10.4% (-12.3% in real terms) in 2007, a complete reversal from the 28.5% (25.7% in real terms) growth in 2005, and 12.7% (10.7% in real terms) increase in 2006, according to StatBank figures.

The price index for one-family houses rose by a mere 0.29% (a fall of 1.8% when adjusted for inflation) in 2007, significantly less than the 23% (20% in real terms) price change in 2005, and 15% (13% in real terms) rise in 2006.

Copenhagen has been badly affected The price of owner-occupied flats in Copenhagen experienced a sharper fall of 14% (16% in real terms) in 2007, from DKK2,257,000 (€302,532), to DKK1,939,000 (€259,906). The price of Copenhagen houses fell 12% (14% in real terms) in 2007, to DKK3,597,000 (€482,147).

End of a house-price cycle

Denmark has experienced three house price cycles during the past 30 years:

• The first cycle began in 1972. Though house prices slightly dropped after the 1973 oil price crisis they recovered immediately and continued rising until 1979. From 1972 to 1979 nominal house prices rose by 96%. Finally the second oil price crisis struck in 1979, leading to a 11.3% fall in house prices between 1979 and 1982.
• The market recovered again in 1982. Prices rose by 88% between 1982 and 1986. Then from 1986 to 1993, the housing market stagnated with property prices falling by 20% (33% in real terms).
• The most recent cycle began in 1993 and peaked between 2006 and 2007. Prices have risen for more than 10 years, and by end-2006, the average price of one-family houses was almost 250% higher than in 1993. Owner-occupied flat prices had risen by a spectacular 330%. Copenhagen owner-occupied flat prices rose by 600% between 1993 and 2006, outperforming almost all other industrialized countries.

Economic growth, low interest rates and the introduction of new mortgage products pushed house prices up in the most recent upturn. Denmark’s economy grew at an average of 3.27% per year from 1995 to 2000. GDP growth slowed to an average of 0.5% between 2001 and 2003 but recovered to an average growth of 2.9% from 2004 to 2006. In 2007, GDP growth was down to 1.8%.

Mortgage market growth

After the slow liberalization of the Danish mortgage industry over the last decade, there is now an innovative mortgage market. Many new products have been introduced, especially variable interest rate products.

Denmark’s mortgage market, already among the largest in the world, has expanded further. From 85% of GDP in 2000, outstanding lending provided by mortgage-credit institutes rose to 119% of GDP in 2007. Total lending increased from DKK1,095 (€147) billion in 2000 to DKK 2,013 (€270) billion in 2007.

Adjustable rate mortgages (ARM) were re-introduced in 1996 and their market share has risen quickly since 2000, especially when interest rates were falling from 2003 to 2005. In October 2003, mortgage-credit institutes began offering loans with deferred amortization for up to 10 years. In the second half of 2004, mortgages loans with an embedded cap on interest rates for up to 30 years were offered.

In 1999, only 9% of the total mortgage value was ARM, while 81% were fixed-rate mortgages. In 2006, the share of ARMs had risen to 52%, with 39% of outstanding mortgages with interest rates fixed for less than 1 year. The share of FRMs had shrunk to 44%.

The Danish mortgage system has many similarities to the US adjustable-mortgage system, where borrowers can refinance loans when interest rates are low, but “lock” in fixed rates when interest rates are rising. In effect, borrowers can take advantage of falling interest rates but are protected from rising rates.

Oversupply; interest rate adjustments

There are two major reasons seen for the current house price downturn: oversupply and an increase in interest rates.

Rapid price increases since 1993 and the lack of housing in major cities have prompted a boom in new construction in recent years. Around 27,000 residential units were completed annually from 2003 to 2007; significantly higher than the annual average of 16,000 units between 1992 and 2002.

Interest rates in Denmark, as in most of Europe, have risen from their historic lows. The official lending rate of Danmarks Nationalbank was raised eight times to 4% in June 2007, from the all-time low of 2% (June 2003-Nov 2005). Effective mortgage interest rates have risen to 5.9% in April 2008, from 3.7% in January 2005.

With the interest rate hikes, the share of FRMs rose to 50% of outstanding mortgages in 2007, while the share of ARMs went down to 46%.

Crippled rental market

Denmark’s private rental market is strongly pro-tenant (see Landlord and Tenant section). It is saddled with extensive rent controls and highly influenced by a huge social rental sector. Rapid price increases combined with strict rent controls have led to low rental yields in Denmark.

Rents are generally fixed by law and are not reflective of market conditions. About half (52%) the 2.5 million households in 2007 are owner-occupiers. The rental market comprises about 46% of the housing stock while other categories comprise the remaining 2%. About 26% of households were under private rental market while 20% were under social rental housing.

Only rental dwellings constructed after 1991 are exempt from rent control (less than 1% of the dwelling stock, or about 10,000 to 15,000 units). Approximately 60% of all private rented dwellings were built before 1940, and only about 11% were built after 1980. In fact, rather few new private rental dwellings are now being built.

Although there has been a slight decline in owner-occupancy in favor of social housing, this is due to the rise of single person households. Owner-occupied dwellings, which cater mainly to families, 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 EU.

Five different forms of 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. Landlords are allowed to pass on costs (property taxes excluded) incurred in the day-to-day operation of the property, and a prescribed charge to cover maintenance costs.

They can also pass on a capital charge, which can vary between 7% and 14%, with properties built after 1963 getting higher amounts. However, the capital charge is calculated on the basis of the value of the house in 1973 with no allowance for inflation.

If the rent is substantially different to that for comparable tenures in the same residential area, both the landlord and the tenant are entitled to ask the Rent Tribunal for the rent to be adjusted.

Properties of less than seven dwellings are covered by different rules relating to the “value of the rented property,” but the result is much the same, as the property gets older, effective rental income returns fall. If the Rent Tribunal fails to reconcile the landlord and tenant, cases can go to a special division of the Country Courts called the Housing Courts (Boligretter).

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.”