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Denmark house price crash: Price declines picking up pace as supply of properties outpaces demand

By Ryan Hogg

Edited by Jekaterina Drozdovica

13:22, 19 October 2022

Colorful historic houses in a cobblestoned street of Haderslev, Denmark
House price declines in Denmark are picking up pace as supply of properties outpaces demand.

Denmark is beginning to face a decline in house prices, after years of growth alongside flat interest rates. Analysts think the pain is just beginning. 

With property tax reform adding to rising supply and interest rates, as well as global economic pessimism, there is an expectation that the Danish housing market will feel the pain. The question now is: how much? 

What is a house market crash?

A housing market crash is defined as a sudden drop in the average price of housing across a market. It is often a domestic phenomenon, but can also be widespread internationally. 

Housing crashes tend to precede after a housing bubble, a situation where house prices are revealed to be dramatically overvalued, forcing a correction that can push prices down by 20% or more.

Bubbles can come from an exogenous shock, as demonstrated in the subprime mortgage crisis of 2007-2008, which triggered a global financial meltdown and a deep recession for several countries, including Denmark. Low quality mortgages given to uncreditworthy households were bundled into overvalued securities, and when those lenders began to default it triggered contagion across financial markets and economies. 

But it can also be down to a shift in the business cycle, and how monetary policy responds. That’s likely to be the key culprit in the next potential Denmark house price crash. When inflation rises too quickly, central banks are forced to remove liquidity from the system to hit their target - 2% for the European Central Bank (ECB). This can be done through interest rate rises and a “tapering” of quantitative easing (QE). 

Those increases filter through to interest rates set by commercial banks, including for mortgage rates. It means homeowners face higher servicing costs on their debts, while would-be homebuyers may be priced out of the market. This causes a combination of increased supply of homes and lower demand, placing a new equilibrium on prices.

Falling prices damage the confidence of homeowners, with many placing most of their asset wealth in housing, hurting spending further in addition to falling disposable income from paying a higher mortgage. Because rising interest rates generally harm investment, the housing market can fall victim to second-order effects from falling output across the economy, which crush incomes and demand. 

Until now, Western financial markets have enjoyed an unprecedented period of low interest rates and slow and steady inflation. That is changing as inflation spikes and policymakers respond by hiking interest rates, causing turmoil in the markets. There is a fear among homeowners and investors that the housing market in Denmark could be next. 

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Denmark’s house prices over the years

The last Denmark house price crash came alongside those in other economies following the 2007 - 2008 global financial crisis, driven by the aforementioned exogenous shock of a mortgage-back financial bubble. 

House prices in Denmark rose by 65% between 2003 and 2006, according to FRED data. Prices proceeded to fall by 28% between 2007 and 2012 as markets corrected aggressively.

Residential property prices in Denmark, 2000 - 2022

Recovery for the Denmark housing market took years, with prices only recovering to pre-housing market crash levels in late 2020, boosted in large part by a steep acceleration in prices of more than 17% between the fourth quarter of 2019 and the first quarter of 2021. The latest ascent has analysts worry there is a new Denmark property bubble. 

What is causing house price declines in Denmark right now?

Interest rates have begun to tick up in Denmark in response to spiralling inflation across the eurozone, where prices rose by 10% in September, a new record and the first time the bloc hit double-digit inflation. Denmark matched that figure of 10% in September. 

Interest rates have climbed above zero in Denmark for the first time in a decade, but still sit below those of the ECB, where the base rate recently hit 0.75%. 

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It has been enough to inspire the beginning of a decline in house prices in Denmark, which started dropping over the summer.

House prices in Denmark, 2020 - 2022

Real estate site Boligsiden found in July that prices for apartments in Denmark fell by 1.5% and houses fell by 1% over the year. The group attributed this to rising supply, with the number of apartments on the market rising by 7.2% and available houses up by 3.8%. Birgit Daetz, director of communications at Boligsiden, said in a note:

"This is an expected consequence of the changed terms that have been applicable to home buyers in recent months…Interest rates have risen, which has made it more expensive to finance a new home. At the same time, buyers must take into account rising energy and electricity prices and a markedly rising inflation, which puts the finances of the individual household under pressure. 

“This affects the number of housing transactions in a market that is also characterized by increasing supply. That cocktail helps to push prices down, as some sellers have to adjust the price to get the deal.”

Danish authorities have also taken steps that could cause a material devaluation to some homes in the future. Property tax reform is going through parliament, which will require new assessments of the values of homes in the country. Experts think this could hit homes that saw big increases in recent years amid low rates in the Denmark housing market. Danske Bank wrote in June:

“The impact of rising interest rates is expected to be greater on houses in the more expensive areas and on owner-occupied apartments in the large cities, as prices clearly rose most here while interest rates were low.

 “Furthermore, these properties will be hit relatively harder by the planned property tax reform and the new property valuations.”

Like most countries, Denmark’s currency, the Krone, has flagged against the US dollar (USD/DKK)  in the last year as economic conditions worsen, with investors flocking to the greenback as a safe haven asset, while also being buoyed by the Fed’s hawkish turn.

Likewise, the currency has fallen against the euro (EUR/DKK) this year as the ECB steps up its regimen of rate hikes.

While Denmark’s presence in the European Union provides its economy with some protection from rising prices thanks to trade agreements, a floundering Krone still leaves Denmark vulnerable to higher import prices, affecting both input costs for manufacturing as well as disposable income among Danish citizens. 

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Danish housing market predictions for 2022, 2023 and beyond

Nationalbanken, Denmark’s central bank, warned a slowdown was on the horizon for the Danish property market: 

“After two years of historically high sales volumes and house price increases of 20 per cent, activity in the housing market has now slowed down. Especially headwinds from higher interest rates and rising prices are weighing on home buyers’ disposable amounts. This is not only a Danish phenomenon, but is also seen in several other countries. 

“The headwinds have already resulted in lower house prices in Denmark, and there are prospects of further declines in the near future. There is great uncertainty about the price development, but overall, prices of single-family homes nationwide are expected to remain significantly higher than before the coronavirus pandemic. At the same time, the housing burden is still low nationwide.

In its assessment as of 21 September, the Nationalbanken forecast house prices to fall by an average of 5.6% in 2023 and by 1.8% in 2024.

In June, Danske bank expected Denmark real estate prices to decline by around 6% between June and the end of 2023. 

Jeppe Juul Borre, the chief economist at Arbejdernes Landsbank, told the CPH Post recent declines in the Danish housing market were likely to be the start of a longer-term setback, though it may not be disastrous. He said:

“The housing market has encountered headwinds due to rising interest rates and high inflation, so it’s not surprising that prices are starting to fall.

“If you’ve owned your house for a long time, it’s not necessarily a bad deal. In the last two years, house prices have risen by around 20%. So even if the fall in prices continues into the autumn, overall you’re still profitable.”

Danish bank Nykredit expected the housing market in Denmark to see prices fall over the next couple of years amid rising interest rates, while apartments could also be affected by new property tax reform.

The bank predicted prices to fall by 5.6% in 2023, while the value of condominiums is expected to fall by 5.1%. House price declines would slow to 1.5% in 2024, the lender said, though condominiums’ descent would accelerate to 5.7%.  


Note that analysts’ predictions can be wrong and shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before trading. And never trade money that you cannot afford to lose. 

FAQs

What does the housing market crash mean?

A housing market crash is defined by a sudden drop in the property prices usually following a shock in housing or other financial markets.

Will house prices drop in 2023?

As of October 2022, most analysts, including Denmark’s central bank Nationalbanken, Danske bank and Nykredit, expected house prices in Denmark to contract through 2023 and fall again in 2024 with the introduction of property tax reforms. Note that their predictions can be wrong and shouldn’t be used as a substitute for your own research.

Is the housing market going to crash in Denmark?

The forecast declines to Danish house prices - according to Denmark’s central bank Nationalbanken, Danske bank and Nykredit, as of October 2022 -  would not see prices fall below pre-Covid levels, with 6% declines only offsetting a third of the rise since 2019.

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