Copenhagen house prices rising strongly, but Danes are way over-borrowed
Last Updated: July 18, 2015
The average price of detached and terraced houses in the capital city Copenhagen soared by 11.3% during the year to end-Q1 2015 (11.1% inflation-adjusted) to DKK28,295 (US$4,107) per square metre (sq. m.), according to the Association of Danish Mortgage Banks (ADMB). Quarter-on-quarter, house prices in Copenhagen increased 1.4% (1.4% inflation-adjusted) in Q1 2015.
Property price rises in the rest of the country were more modest. Detached and terrace house prices in Denmark rose by 5.7% (5.5% inflation-adjusted) y-o-y to Q1 2015, to an average of DKK11,737 (US$1,704) per sq. m. On a quarterly basis, detached/terraced house prices in the country rose by 3.9% (3.9% inflation-adjusted) during the latest quarter.
During the year to end-Q1 2015:
- In the Capital region, i.e. Copenhagen and its hinterland, average detached/terraced houses prices rose by 7.6% (7.4% inflation-adjusted) to DKK20,663 (US$2,999) per sq. m.
- In Zealand region, house prices rose by 5.8% (5.6% inflation-adjusted) to DKK9,904 (US$1,437) per sq. m.
- In Southern Denmark, house prices increased 3.4% (3.2% inflation-adjusted) to DKK8,824 (US$1,281) per sq. m.
- In Central Denmark, house prices rose by 5.2% (5% inflation-adjusted) to DKK10,821 (US$1,571) per sq. m.
- In North Zutland, house prices rose by 5.4% (5.2% inflation-adjusted) to DKK8,360 (US$1,213) per sq. m.
Apartments fared specially well. Owner-occupied flats´ average price rose 9.6% (9.4% inflation-adjusted) y-o-y to Q1 2015, to an average of DKK21,306 (US$3,092) per sq. m., according to ADMB. But holiday home prices were up by just 2.6% (2.4% inflation-adjusted) to DKK13,736 (US$1,994) per sq. m..
The Danish economy grew by a meagre 1% in 2014, after contracting by 0.5% in 2013 and by 0.7% in 2012 and minimal growth of 1.2% in 2011 and 1.6% in 2010, according to the International Monetary Fund (IMF). The economy is expected to expand by 1.8% this year and by another 2.1% in 2016, \according to the European Commission.
Housing boom and bust
Property prices in Denmark peaked in Q2 2007, after huge rises during 2003-2007:
- Prices in the capital region rose by 88.3% (75.6% in real terms), from Q1 2003 to Q2 2007, the highest regional gain.
- Prices in the Central Denmark rose by 72.2% (60.6% in real terms) during this period.
- Zealand prices rose by 70.13% (58.7% in real terms).
- Price increases in other regions ranged from 63.3% for Southern Denmark (52.3% in real terms), to 57.7% for North Jutland (47.1% real).
- The national average rose 75.4%, or 63.6% in real terms (all figures from ADMB).
Property prices then dropped about 15.4% (-19.3% inflation-adjusted) from Q2 2007 to Q3 2009 due to the global financial meltdown, dragging many regional lenders into bankruptcy and pushing the economy into recession.
The biggest price-drop occurred in the Capital Region where house prices fell by 25.3% (-28.8% real). House price falls in other regions ranged from 21.3% for Zealand (-24.9% real), to 2.2% in North Zutland (-6.7% real). Copenhagen house prices dropped 21.6% (-25.2% in real terms).
The regions that experienced the highest price rises during the boom generally had the biggest price falls during this period.
After a short-lived recovery from Q3 2009 to Q3 2010 (with property prices rising by 4%, or 1.6% when adjusted for inflation), property prices fell again by about 9% from Q4 2010 to Q4 2012, mainly due to the adverse impact of the eurozone debt crisis. The housing market has gradually recovered since then.
Time-on-market before a house sells is typically amazingly long
Sales of owner-occupied flats surged 36.8% to 4,881 units in the first quarter of 2015 from the same period last year, according to Statistics Denmark. Sales of one-family homes rose 17.1% to 9,410 units.
The average time-on-market to sell a house remains very high, but is now declining (except for holiday homes).
- Detached/terrace house average days on market decreased to 229 days in Q1 2015, from 233 days in Q1 2014.
- Owner-occupied flats sold in an average of 145 days in Q1 2015, down from 160 days in the previous year.
- Holiday homes sold in an average of 355 days in Q1 2015, up from 341 days in a year earlier.
Residential construction is plunging, which may underpin the housing market
Residential construction permits, completions, starts, and under construction all fell during the first quarter of 2015:
- Residential construction permits plummeted by 30% y-o-y to 2,019, according to Statistics Denmark.
- Starts also dropped 29.1% to 3,133 units in Q1 2015 from the same period last year.
- Completions fell by 13.9% to 49,220 units in Q1 2015 from a year earlier.
- Residential buildings under construction also dropped slightly by 1.2% y-o-y in Q1 2015, to 3,089 units.
From an average of almost 29,500 permits in every year in 2002-07, residential permits plunged to just an average of 14,000 annually in 2008-14.
Interest rates are astonishingly low, which is also helping the market boom
In the first two months of 2015, Danmarks NationalBank reduced its certificates of deposit rate several times to -0.75%, in an effort to defend its peg on the krone against the euro. The lending rate, discount rate and the current account rate have been unchanged at 0.05%, 0%, and 0%, respectively.
“The interest rate reduction follows Danmarks Nationalbank’s purchase of foreign exchange in the market,” said Danmarks NationalBank.
Mortgage interest rates also remained very low. In 2014, the short-term mortgage rate averaged 0.19%, down from 0.23% in the previous year, according to the ADMB. Likewise, the long-term mortgage rate also dropped to 3.08% last year, from 3.48% in 2013.
The Danish mortgage market looks healthy, judging by the low default rate
The size of the mortgage market contracted slightly to 130.6% of GDP in 2014, down from 131.4% of GDP last year, and 133.7% of GDP during the peak year of 2009.
Mortgage arrears fell to 0.24% in Q4 2014, the lowest level since Q2 2008, according to ADMB. Likewise, the total number of repossessed dwellings dropped 40.3% to 225 units in Q1 2015.
But some analysts say a US-style mortgage bond crisis is building, as the Danes are the OECD´s most indebted people.
Danish households’ average personal debt equals 309% of income, the highest ratio among the 34 members of the OECD, according to Financial Times.
Borrowers would be very exposed to any rise in interest rates. No less than 57% of Danish mortgages have long interest-only periods, up from only 10% in 2004. Adjustable-rate mortgages are now 71% of all mortgages (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).
The tendency is for some to not be able to afford them, due to the economy´s weak recovery. Refinancing is an option for many, but not for the most precarious borrowers, due to legal restrictions on loans of more than 80% of a property’s value, according to the Economist.
Denmark’s US$550 billion mortgage bond market is heading for a “potential crisis”, British private bank Arbuthnot Latham has cautioned. Rating companies are worried. The share of bonds with maturities of less than five years has more than doubled to 69% during the past five years, according to the Association of Danish Mortgage Banks (ADMB). The mismatch means that some bonds must be rolled over each year.
Although a recent law extends by 12 months maturities on bonds which finance longer-term loans, “Some of the consequences of the Danish funding structure are addressed in the bill, but the causes are not,” says ratings agency, Fitch.
“The law, as we understand it, will not discourage the use of short-term F1 mortgage loans,” said Alexander Ekbom, analyst at Standard and Poor’s, referring to loans that are financed annually. “Therefore mortgage lenders’ dependence on short-term liabilities will remain high, perpetuating the status quo,” he added.
Rental yields moderate to good, despite a highly regulated market
In recent years rental yields have recovered in Denmark, as rents have risen faster than house prices recently. Average rental yields in Copenhagen typically range from 4.84% to 5.31%, according to Global Property Guide research.
Apartments of 120 square metres (sq. m.) yield 4.84%. Apartments of 50 sq. m. yield 5.27%.
Denmark´s rental market is strongly pro-tenant
Denmark’s housing market is fundamentally distorted by misguided social policies. The private rental market is strongly pro-tenant (see Landlord and Tenant section). Rents are non-responsive to market forces because there are five different forms of rent control, depending upon the age of the building. Private sector rents are regulated based on historic costs, and there is a huge social rental sector.
Progressively, the private rental sector has been discouraged:
- Before the 1980s, dwellings occupied by tenants comprised more than 86% of country´s total households.
- By the 2008, more than half (51%) of the 2.5 million households were owner-occupied, according to Statistics Denmark. The rental market comprised about 47% of the housing stock, while other categories comprised the remaining 2%. Now the rental sector is back up at 49% of Denmark´s 2.59 million households.
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). Yet rather few new private rental dwellings are now being built.
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 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.
Danish economy remains weak
In 2008, Denmark was one of the first countries in Europe to go into recession. The economy contracted by 0.7% in 2008 and by 5.1% in 2009.
Boosted by government spending and the global recovery, Denmark’s GDP rose by around 1.6% in 2010 and by another 1.1% in 2011. However it shrank again by 0.7% in 2012, and 0.5% in 2013, and grew a meagre 1% in 2014.
The economy is expected to expand by 1.8% this year and by another 2.1% in 2016, according to the European Commission.
Virtue unrewarded: Socialists slash fiscal deficit, get booted out.
After the Social Democrat prime minister Helle Thorning-Schmidt took austerity measures that improved government finances, the country recorded a public budget surplus of 1.2% of GDP in 2014, after a deficit of 1.1% of GDP the previous year. Gross public debt stood at 45.2% of GDP in 2014. Mrs Thorning-Schmidt´s measures were however unpopular, resulting in her party´s defeat in 2015 and her resignation.
Inflation was 0.6% in 2014, according to the IMF.
Denmark’s unemployment was 4.5% in May 2015, down from 4.8% in a year earlier, according to Statistics Denmark. Unemployment had averaged 7.2% from 2010 to 2014.
In June 2015, Lars Lokke Rasmussen leader of the centre-right liberal party, Venstre, returned for his second innings as Denmark’s PM.
- Copenhagen - another housing bubble? - June 27, 2014
- Denmark's housing slump continues - May 15, 2013
- Denmark's short-lived housing market recovery - December 02, 2011
- House price rises halt as Denmark’s economic recovery falters - February 23, 2011
- Resilient mortgage market cushions house price falls - May 12, 2009