MR 2018

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Copenhagen Property Market Report 2018

Although the current appreciation rates seem steep, it should be noted that the growth rates preceding the most recent housing market bubble were much higher, i.e. 20-40% p.a. We believe that the current price hikes are driven by record-low interest rates, rising real wages and a structural housing undersupply, rather than speculation. The Danish FSA has become increasingly focused on financing options as a key driver of price hikes and the systemic risk they may pose. Like previous years, 2017 introduced further regulation of the Danish mortgage banking sector. Effective from 2018, mortgage banks are required to limit their high-risk loan portfolios (a high-risk loan being defined as a variable interest rate or interest-only loan held by a household with a debt more than four times its annual income) to 15% of the total loan portfolio value. According to FSA estimates, the current ratio averages 35%. In addition, the Danish Government has abolished the housing tax freeze introduced in 2002 effective from 2021. Although previous regulations have done little to limit price hikes, we expect the new measures to be more effective, as they will force mortgage banks to be selective with their loan commitments and incentivise more homeowners to opt for mortgages with amortisation and fixed interest rates. In addition, the abolishment of the housing tax freeze is bundled with a property tax reform that should facilitate more accurate valuations of owner-occupied flats, ensuring increased consistency with market values and thereby reduced price volatility. Today, virtually all owner-occupied flats are taxed on the basis of 2002 public valuation figures, which significantly undershoot actual market values in Copenhagen where price hikes have been most pronounced. In spite of the regulatory measures, we predict that supply/demand fundamentals will remain sufficiently strong to justify uptrending prices in most districts. We estimate that the housing cost burden is still sustainable and leaves rooms for price increases. We also believe that these fundamentals should somewhat cushion the market against sudden price drops triggered by future rate hikes, although growth would likely stagnate. Rental growth stunted as market tightens In 2017, the residential letting market remained seemingly robust, characterised by few or virtually no vacancies and strong demand. However, prospects of substantial rent hikes weakened as the gap between prime and secondary market rents narrowed, causing affordability constraints to become more pronounced. The demand profile and demographics of the rental market are the root causes that curb rental growth. Broadly speaking, residential tenants are either long-term or short-term tenants. The former category includes households that prefer the flexibility associated with rental housing, e.g. young families, old-age pensioners freeing up home equity or groups without the financial means to enter the housing market, the latter of which predominates this category. Short-term tenants typically demand a predefined lease duration, e.g. expats and households in the process of entering the housing market. These tenants are typically less price sensitive as the need for flexibility outweighs the higher housing burden compared to the ownership market.

Prime market rent DKK 2,000 per sqm

Prime to average rental spread 15% Source: Sadolin & Albæk