Yet, even if real estate economists warn of a drastic impact on house prices as authorities tackle bank loans to deflate the bubble, the fact remains that Denmark’s economy is booming – so much so that a leading Danish politician wrote a full-page article for a British quality newspaper in November 2017, inviting EU citizens fleeing Brexit Britain to live and work in Denmark, where their skills and input would be appreciated and they’d be made to feel welcome. An influx of EU buyers would certainly put a stop to any measures taken by the government to curb house price rises so far.
Negative Interest Rates prompted unprecedented House Price Rises in Aarhus & Copenhagen
Danish house buyers have enjoyed half a decade of negative interest rates, which saw house prices go up and up. With inflation at 1.1% reported in April this year and short-term home loans offered at negative interest rates, the property market made a robust comeback after its spectacular crash in 2008. Seen from peak to trough, Danish home values slumped by over 30%, when the economic crisis occurred.
House prices are now close to what they were before the world-wide economic crisis hit, with apartment prices in Copenhagen up by 12% annually reported in April this year and a general increase of ca. 10% above peak prices reported for apartment values across the country. Some properties in Copenhagen have risen five-fold over the last five years.
The sharp increase in Denmark’s home values drew the attention of the International Monetary Fund, which viewed the situation with “concern” in the light of high household debt. The organisation advised that a reduction of tax deductibility of mortgage interest payment might be a good way to cool off the market.
Introduction of stringent Lending Criteria
At the end of September 2017, CPH Post reported that Denmark’s real estate market might see a dramatic change in the coming months, as tens of thousands of homeowners in Copenhagen and Aarhus municipalities would face higher monthly repayments.
Hoping to avoid a repeat of a toxic housing bubble, Denmark’s Business Ministry, together with the country’s financial supervisory authority Finanstilsynet moved in to severely restrict banks and other lenders. The new measures will prevent lenders from offering the types of home mortgages that come without fixed interest rates and monthly instalments.
From now on, banks and other credit institutes will only be permitted to hold a lending portfolio that contains no more than 15% of “high-risk interest rate” and repayment-free mortgages, a move by the state that lenders view with concern.
In an interview with newspaper Politiken, Lise Nytoft Bergmann, a real estate economist working for Nordea Bank, said: “I don’t think people are aware that these changes are on the way, and that they can have quite significant consequences for very many homeowners.”
Many mortgage customers hadn’t quite realised how the rule changes would impact on them. Bergmann added that it wasn’t just the central districts of Aarhus and Copenhagen that would be affected, but “a long line of other Capital Region municipalities that will be impacted by the new rules – including Ballerup, Albertslund and Ishøj.”
She urged home loan borrowers in the affected municipalities to take a close look at these new rules, be they new mortgage customers or seasoned borrowers.
A restriction of home loan options in these core areas of economic growth are likely to send house-hunters to other municipalities where the government’s new directive isn’t implemented, such as Egedal and Furesø. Such a move would certainly help to cool off the over-heated markets of Aarhus and Copenhagen.
However, quite a few property experts believe that the state’s attempts to slow house price rises is too strict and could actually send the housing market heading into another recession.
Is Denmark’s Housing Boom about to deflate?
Speaking to newspaper Politiken, Mikkel Høegh, real estate economist with BRF Kredit, said: “The new rules will curb price development in the impacted municipalities, and that’s basically the purpose of them.”
He added: “But as regards the bigger picture, there are a lot of other initiatives aiming to tackle the price development – primarily through a tax reform. So we are afraid we will see the opposite of a bubble: a downward trajectory that will completely deflate the housing market.”
Some experts believe that parents buying property for their children via the so-called parental buy scheme (forældrekøb) would be adversely affected by the stringent new rules on lending.
Other real estate economists suggested that the worst affected by the strict ruling on mortgage lending would be pensioners, as their monthly incomes are lower, and the new rules won’t take their equity in their homes or other assets into account.
It is too early to tell what impact the new rules will have, as they only came into force at the beginning of October 2017, however, those looking to buy homes in Aarhus and surrounding municipalities Braband, Egå, Højbjerg, Malling, Risskov, Sabro, Skødstrup, Tranbjerg and Trige will already have been affected by the strict new lending criteria and may now be heading to other parts of the country in search of their first home.