European Supplement

Developments in the Danish housing market

European supplement

The strong price increases in the Danish housing market in recent years have been the result of a combination of factors such as generally positive financial trends, a low unemployment rate, the tax freeze, the introduction of new loan types and low interest rates. This price development continued throughout the first half of 2006, but in the second half of the year the growth rate in property prices slowed. The increasing level of interest rates (The Danish central bank increased the base rate six times during the course of 2006, from 2.5 to 3.75 per cent) and the fact that in some parts of the country prices had reached record high levels are the most likely factors behind the slow-down in prices seen towards the end of the year. For the Danish housing market in general, however, there are no indications of generally decreasing housing prices in 2007. We expect a moderate price development, and regionally we might see slight price decreases.

Activity levels and prices

After several years of strong development in the Danish housing market, the activity level waned in 2006. About 45,500 sale transactions in single-family and terraced houses were completed on the basis of mortgage lending; that was 7 per cent less than in 2005. The corresponding number of such transactions in owner-occupied flats and weekend cottages fell by 20 and 25 per cent, respectively.

Despite the decreasing number of transactions, prices of Danish owner-occupied homes continued rising in 2006. According to Realkreditrådet’s property statistics, an average house cost almost 20 per cent more at the end of 2006 than the year before. The average price per square metre for owner-occupied flats and weekend cottages increased by around 10 per cent.

Figure 1: Prices of owner-occupied homes per square metre, 1995–2006

Source: Realkreditrådet.

Prices of single-family and terrace houses are highest in the metropolitan area around Copenhagen, and this is also where prices have been increasing the most in recent years. In the metropolitan area, prices per square metre are now more than twice as high as the average for Denmark as a whole. Still, while prices of single-family and terrace houses showed an increasing trend in most of the country throughout 2006, the lower activity level towards the end of the year translated into slight price decreases in the metropolitan area in Q4 2006. Prices in the market for owner-occupied flats fell by 1.1 per cent in Q4 2006.

Mortgage bank lending

In 2006, the loans granted by Danish mortgage banks totalled DKK 470bn, which was almost 40 per cent less than in 2005, which was a record year. This development was primarily due to the fact that the level of remortgaging activity was significantly lower than in 2005, when the interest development made it advantageous for many borrowers to remortgage their home loans. The level of remortgaging in 2006 was the lowest since 2002.

Net lending – which reflects the real increase in loans granted by the mortgage banks – amounted to well over DKK 160bn in 2006, which was at the same level as the all-time high volume of net lending in 2005. Despite the slightly higher level of interest rates in 2006, the generally positive financial climate led to considerable activity in the building sector – among other things in the shape of rebuilding and extension projects in the owner-occupied housing market.

At the end of 2006, the remaining bond debt totalled DKK 1,858bn, an increase of DKK 170bn or almost 10 per cent compared to 2005. The total loan volume of the Danish mortgage banks amounts to almost 115 per cent of the Danish GDP. In relative numbers, this makes Denmark the world’s largest private mortgage bond market.

Popular loan types

A glance at the Danes’ choice of home loans reveals that interest-only loans continued to be popular in 2006. Just below 40 per cent of the total volume of loans granted to owner-occupied homes and weekend cottages of DKK 1,020bn was interest-only loans at the end of the year.

The capped variable-interest loans, introduced to Danish homeowners in Q4 2004, were also popular. In 2006 many homeowners thus chose to replace their ARM loans with capped variable-interest loans and fixed-interest loans. Capped loans amounted to DKK 253bn at the end of 2006, corresponding to 23 per cent of the loans granted to owner-occupied homes and weekend cottages (compared to 16 per cent in 2005). At the same time, the volume of ‘pure’ ARM loans went down from representing 34 per cent of loans to owner-occupied homes in 2005 to 26 per cent in 2006.

The fact that many borrowers chose capped loans and fixed-interest loans in 2006 underlines the flexibility of prepayment of home loans in the Danish mortgage credit system. In view of the increasing short rates and the expectations that this situation will prevail in 2007, and in view of the very narrow spread between long and short rates, the previously attractive ARM loans, which are based on short bullet bonds, grew less and less attractive throughout the year. That is the reason why many Danes chose the fixed-interest loans or the capped loans in 2006.

It will be interesting to monitor the development in both the Danish and the European housing market in 2007. Based on a continued strong Danish economy, we expect to see a moderate price development without general price decreases in the housing market in the year ahead. Yet it cannot be ruled out that some areas of the country will experience slightly decreasing prices, e.g. on owner-occupied flats in Copenhagen and in the weekend cottage market.