Fears about a recurrence of a new property bubble dog the Scandinavian housing markets – with some reason. In Denmark, the price of an apartment in the port city of Copenhagen has risen twice as fast as house prices in the same area, according to Denmark’s statistics agency.
It means apartment prices in Copenhagen now are higher, relative to income, than they’ve ever been in Denmark – and there’s never been a bigger mismatch between house and apartment prices either, says Danske Bank A/S (Danske), which is both Denmark’s largest bank and the parent company of the country’s second largest mortgage lender. The sales price of an apartment rose by 6.3% year-on-year in May this year; house prices rose by 2.4% year-on-year in the same period.
Denmark isn’t the only Scandinavian economy that’s showing signs of pressure, and Sweden and Norway are both already working to cool their bubbling housing markets, especially in major cities.
Sune Mortensen, vice president at Nykredit Realkredit A/S, Europe’s biggest issuer of mortgage-backed covered bonds, weighs in. ‘You see growth again, you see rising home equity again,’ Mr. Mortensen says, adding, ‘when we saw that the last time, people lost their minds and their good sense.’
Apartments have been a better indicator than houses of the direction of the housing market, and the apartment market is speeding up at a far faster rate than the house market. An 80-square-metre apartment in Copenhagen now costs the same as a 140-square-metre house, according to Christian Heinig, chief economist for RealKredit Danmark, Danske Bank’s mortgage arm.
So what’s causing the disparity? Low interest rates, which restricted price falls after the 2008 collapse to about 20% (for comparison purposes prices fell in Spain by 46% overall and up to 70% in some areas), now risk sending prices rocketing as credit comes into the reach of more people faster.
Mr. Heinig thinks this risks causing a second bubble, especially in the Copenhagen area, and points out that low interest rates and a market led by red-hot major cities and not appreciably cooled by rural slumps is a worldwide phenomenon. The peak in prices represented by Copenhagen isn’t just tall – it’s narrow too.
In Copenhagen’s suburbs prices are almost a third lower. ‘The risk,’ he told Bloomberg, ‘will naturally rise as soon as the Danish economy moves into high gear at the same time rates stay relatively low for a long period.’
Denmark may have the same housing market problems as a lot of other countries – but it has some issues that are all its own too. Demand for Denmark’s covered bonds, which fund virtually all mortgages in Denmark, may be fuelling price increases by holding down the cost of borrowing and increasing demand. Add in the increasing safe-haven investment from Ukraine, where investors fear political unrest and see Denmark as secure, and there’s a recipe for danger. When that combines with a rising tide that makes Danish families to forget the lesson of the 2008 crash – ‘be wary of debt’ – it’s easy to see why so many people are concerned.