Danish house prices continue to rise, despite tighter lending regulations
Lalaine C. Delmendo | August 15, 2019
Danish house prices continue to rise, despite falling demand due to the introduction of tighter lending standards last year, coupled with slowing economic growth.
The price index of one-family houses in Denmark rose by a modest 3.28% (2.47% when adjusted for inflation) during 2018, after y-o-y increases of 4.01% in 2017, 3.53% in 2016, 6.29% in 2015 and 3.54% in 2014, according to Statistics Denmark. Though quarter-on-quarter, the price index dropped slightly by 0.46% (-0.14% inflation-adjusted) in Q4 2018.
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 2018:
- The average price of owner-occupied flats rose by 3.5% y-o-y to DKK27,555 (EUR3,691) per square metre (sq. m).
- Detached/terraced house prices rose by 4.2% y-o-y to an average of DKK13,736 (EUR1,840) per sq. m.
- Holiday home prices rose by 1.6% y-o-y to an average of DKK14,863 (EUR1,991) per sq. m.
By region, during 2018:
- In the Capital region, i.e. Copenhagen and its hinterland, the average price of owner-occupied flats rose by 3% y-o-y to DKK34,989 (EUR4,687) per sq. m.
- In Zealand region, house prices rose by 4.6% y-o-y to an average of DKK17,042 (EUR2,283) per sq. m.
- In Southern Denmark, house prices surged 10.7% to an average of DKK16,617 (EUR2,226) per sq. m.
- In Central Denmark, house prices increased 4.1% y-o-y to DKK22,608 (EUR3,028) per sq. m.
- In North Zutland, house prices fell slightly by 0.1% y-o-y to an average of DKK17,217 (EUR2,306) per sq. m.
Demand is now falling. During 2018, the total number of registered sales for one-family houses fell by 1.2% to 48,065 units, in sharp contrast to a y-o-y growth of 12.4% in the previous year. Likewise, sales for owner-occupied flats dropped 7.8% y-o-y to 16,787 units in 2018, in contrast to a 5.8% increase in 2017.
Residential construction activity continues to fall, which partly explains the continued increase in prices despite weak demand. In 2018, permits fell by 14.6% y-o-y to just 22,619 units, following 15.8% decline in 2017, according to Statistics Denmark.
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 2018, total mortgage outstanding rose by 2.1% y-o-y to DKK2.76 trillion (EUR369.3 billion), according to the ADMB.
In 2018, Denmark’s economy grew by an estimated 1.2%, a slowdown from GDP growth rates of 2.3% in 2017, 2% in 2016, and 1.6% in both 2014 and 2015, amidst economic slowdown in Europe, the country’s biggest export market. The economy is expected to expand by 1.6% this year and by another 1.3% in 2020, according to the European Commission.
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).
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 4.23% (3.41% in real terms)
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.
Demand is slowing
Demand is now weakening. During 2018, sales of detached/terraced houses increased slightly by 1% to 40,715 units from a year earlier, according to the ADMB. On the other hand, sales of owner-occupied flats fell by 7% to 15,181 units while holiday home sales dropped 3.3% to 7,505 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 decreased to 168 in Q4 2018, from 178 days in Q4 2017, 195 days in Q4 2016 and 204 days in Q4 2015, according to the ADMB.
- Owner-occupied flat average days-on-market were 117 in Q4 2018, up from 106 days in Q4 2017, 116 days in Q4 2016 and 115 days in Q4 2015.
- Holiday home average days-on-market were 281 in Q4 2018, down from 309 days in Q4 2017, 317 days in Q4 2016 and 301 days in Q4 2015.
Residential construction activity continue to fall
Residential construction permits, starts, and under construction all fell in 2018:
- Residential construction permits fell by 14.6% y-o-y to just 22,619 units in 2018, following a decline of 15.8% in 2017, according to Statistics Denmark.
- Starts plunged by 34.5% y-o-y to 14,997 units in 2018, after falling by 19% in the prior year.
- Dwellings under construction plunged almost 40% to 18,963 units in 2018 from a year earlier, worse than the previous year’s 4.9% drop.
- Completions rose by 12.4% y-o-y to 27,566 units in 2018, following a 16.1% growth 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 2018, about 49.3% of dwellings in Denmark were owner-occupied (or 1,319,878 units) while 50.4% were occupied by tenants (or 1,351,145 units), according to Statistics Denmark.
Mortgage rates below zero
Mortgage interest rates remains negative. The short-term mortgage rate averaged -0.51% in 2018, slightly up from -0.55% in 2017 but still 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. On the other hand, the long-term mortgage rate dropped to 2.12% in 2018, from 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.
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 14 weeks of 2019, the short-term mortgage rate was at an average of -0.48% while the long-term mortgage rate dropped to 1.93%.
The Danish mortgage market looks healthy, judging by the low default rate
The size of the mortgage market was equivalent to 123.6% of GDP in 2018, down from 133.1% in 2009. Total mortgages outstanding have risen by just an average of 2.35% annually from 2009 to 2018, after annual growth of 7.8% from 1998 to 2008.
Mortgage loans with variable interest rates have been gradually falling in recent years. In 2018, variable-rate mortgages accounted for 64% of total loans – down from 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 36% of total mortgage loans.
Mortgage arrears remain low at 0.2% in Q3 2018, at par with the previous year, based on figures from ADMB. Likewise, the number of repossessed dwellings dropped 30% y-o-y to just 335 units in 2018 - the lowest level in a decade.
High household debt not a threat to financial stability, says Danmarks NationalBank
While household debt has continuously fallen in the past nine years, the Danes remain the most indebted people in the OECD. Danish households’ average personal debt currently equals 281% 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, 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.
“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.
"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 2018, up from only 10% in 2004. Adjustable-rate mortgages were about 64% of all mortgages in 2018. 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 about 63% in 2018 from 47.5% in 2008, according to the ADMB. The mismatch means that some bonds must be rolled over each year.
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, low unemployment
In 2018, Denmark’s economy grew by an estimated 1.2%, a slowdown from GDP growth rates of 2.3% in 2017, 2% in 2016, and 1.6% in both 2014 and 2015, amidst economic slowdown in Europe, the country’s biggest export market. In addition, the economy is also negatively affected by a one-off transaction linked to the sale of a Danish patent in 2017.
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 in an effort to prop up the economy during the period resulted in a budget deficit of 1.5% of GDP in 2015 and 0.4% of GDP in 2016. In 2018, the country’s budget balance returned to a deficit of about 0.7% of GDP, after registering a surplus of 1% of GDP in 2017.
The country’s government debt declined to about 34.7% of GDP in 2018, from 35.3% of GDP in 2017 and 37.9% of GDP in 2016, according to the IMF. In fact, it was one of the lowest in the EU. Government debt is expected to fall further to 34% of GDP in 2019 and to 33.1% in 2020.
The economy is expected to expand by 1.6% this year and by another 1.3% in 2020, according to the European Commission.
Inflation stood at 1.2% in March 2019, up from 0.5% in the same period last year. Inflation is expected to be 1.2% this year before accelerating to 1.7% in 2020, according to the European Commission.
Denmark’s unemployment was 4% in February 2019, down from 4.3% a year earlier and far lower than the 7.8% jobless rate recorded in the euro area (EA19) over the same period, according to Statistics Denmark.
In February 2019, unemployment for men and women in Denmark stood at 3.9% and 4.1% respectively. Overall unemployment had averaged 4.7% from 2007 to 2018.
- Construction (Statistics Denmark): https://www.dst.dk/en/Statistik/emner/erhvervslivets-sektorer/byggeri-og-anlaeg/byggevirksomheden
- Sales of Real Property (Statistics Denmark): http://www.statbank.dk/statbank5a/SelectVarVal/saveselections.asp
- 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/
- World Economic Outlook Database, October 2018 (International Monetary Fund): https://www.imf.org/external/pubs/ft/weo/2018/02/weodata/weoselco.aspx?g=2001&sg=All+countries
- Official Interest Rates (Danmarks Nationalbank): http://www.nationalbanken.dk/en/marketinfo/official_interestrates/Pages/Default.aspx#ctl00_ctl39_g_b26c6544_55f0_4e4a_af7c_dbb8cbe6ad21_myContainer
- Copenhagen’s rental yields range from 4.84% to 5.31% (Global Property Guide): https://www.globalpropertyguide.com/Europe/Denmark/Rental-Yields
- Labor, Income and Wealth (Statistics Denmark): http://www.statbank.dk/statbank5a/default.asp?w=1280
- 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
- Denmark Posts ‘Solid’ 2018 Growth as Unemployment Edges Down (Bloomberg): https://www.bloomberg.com/news/articles/2019-02-28/danish-gdp-growth-rate-little-changed-as-unemployment-edges-down
- Household Wealth and Debt (Danmarks Nationalbank): http://www.nationalbanken.dk/en/publications/themes/Pages/Household-wealth-and-debt.aspx
- Danish households are resilient despite record debt levels (Danske Bank): https://danskebank.com/news-and-insights/news-archive/insights/2018/28112018