Denmark is a small Scandinavian country, but its well-developed real estate market, makes it a very interesting case study.
Today approximately 1.2 million people live in Copenhagen. That is 22 % of the population in Denmark. The greater Copenhagen region is home to approximately 1.95 million residents. The second largest city, Aarhus, has approximately 256,000 citizens today. Current population of Denmark is 5.6 million which is expected to grow to up to 6.2 by year 2050.
The approximate number of households in Denmark today is 2.5 million. There were around 465.000 private rented dwellings in 2010, which is around 23 % of all households.Source: DK Statistik, Koncernservice, Københavns Kommune.
Average useful floor area per dwelling in Denmark in 2009 was 114.4 m2. That equals 51.4 m2 per person. This is probably a large area compared to other countries, but the Danes have been accustomed to living in large dwellings when possible, and because of this demand for larger apartments and houses, floor area in new-build houses has also increased. It is not uncommon that a family of two adults and two children have a house larger than 150 m2. This development has continued through recent years. Of course, students and other persons with lower incomes do not have the possibility to rent or buy larger homes. Therefore smaller apartments are still being built.
Private property financing
Housing prices are mainly powered by economic fluctuations and interest rates. Decreasing interest rates and new mortgage loan types had been introduced and property value taxes were frozen in 2002. These factors all contributed to rising prices. The introduction of amortisation-free loans (2003) is considered to be the main cause of rapid price increases in the period before the most recent financial crisis.
The typical financing of home ownership is based on a down-payment of 5% (own equity or personal loan), 15% from loans based on a mortgage from a bank or other financing, and 80% from a mortgage-based loan from a mortgage bank. Financing is regulated by law; a mortgage bank can finance only up to 80% of the trading price through mortgage loans. The usual length of contracts on new mortgage loans is 30 years.
Denmark, like many other advanced economies, allows mortgage interest deductibility from taxable income. The degree of mortgage interest deductibility has been lowered in stages over time. The 1994–98 tax reform reduced deductible interest payments to about 46 percent, and deductibility was lowered further to 33 percent in 2002. Starting from 2012, mortgage interest deductibility for interest payments exceeding DKK 50,000 is planned to be reduced to 25 percent by 2019. In 2014, interest deductibility still remains at 33 percent. Despite the gradual reduction in mortgage interest deductibility, the degree of tax relief on debt financing cost, measured by the difference between the market interest rate and the after-tax debt financing cost of housing, is high in Denmark among OECD countries, the third most generous after the Netherlands and Czech Republic.
Fundamentally, it can be said that when the economy is strong, the Danish system makes the purchase of property attractive as an alternative to renting. As an owner of property, it is possible – if prices are rising – to earn a tax-free profit on the sale of one’s property. In addition, the “tax-free value” that arises when the value of the property exceeds the amount for it was purchased can also be mortgaged, enabling the homeowner to release money to fund purchases, for example. A tenant does not have this advantage. On the other hand, the tenant would not be able to borrow large amounts of money from a bank or mortgage company and therefore would be subject to very little financial risk.Source: Boligmarkedsstatistikken Source: Boligmarkedsstatistikken Source: Boligmarkedsstatistikken