COPENHAGEN, Denmark (CN) — In 2018, the World Bank published a report on housing, mobility and welfare in European Union member states. Denmark was found to have one of the highest housing cost overburden rates in cities.
The report also said that homeowners are more likely to benefit from overall economic growth because, in general, renters see their increased salaries tempered by increases in monthly housing costs.
Since then, Denmark has experienced a housing bubble, as prices went up 21% since the first Covid-19 lockdown in 2020. While inflation and high interest rates have experts forecasting a price decline by the end of this year, homeowners in Denmark´s largest cities – Copenhagen, Aarhus, Odense, and Aalborg – still benefit from the high demand in a market with limited supply.
That's according to housing expert Jørgen Munksgaard Rasmussen from the Knowledge Center Bolius. He described the dynamic as a “spiral."
“It is a self-reinforcing spiral objectively contributing to an increase in wealth inequality. If you bought a flat in central Copenhagen for the price of 1 million DKK [about $140,000] 10 years ago and sell it for 3 million today, you suddenly have equity of 2 million. Parents can use the leverage to buy flats for their kids in attractive areas. So the investments and accumulation of wealth accelerate,” he said in an interview.
Yet, he emphasized that housing prices have primarily gone up in the city areas and provinces, whereas the rural areas have stagnated.
Not surprisingly, according to government agency Statistics Denmark, the capital area tops the most recent list of housing burden rates, calculated by how much of their monthly income a household must spend on homeownership costs such as mortgage and property taxes.
Last year, housing costs accounted for over half of the total salary for homeowners in Copenhagen. That makes it very costly to get hold of property in the city but it's also a lucrative investment.
Rasmussen explained how a combination of deindustrialization on one hand and political centralization of state functions on the other has driven the demand for housing in urban areas to new heights.
“Over the years, we have seen a depopulation in the outlying areas. It is similar to the development in the U.S. and the rest of Europe. As we outsource production to countries with competitively lower wages, local factories have closed, causing the working class to move towards the cities to find new jobs,” Rasmussen said.
He added, “And then you have the public structural development, where the Danish government has gathered police districts, closed the smaller hospitals, abolished the counties, and moved local schools. That leaves the rural districts behind regarding education and job opportunities, as well as service facilities and cultural offers.”
The result of this geographical divide in Denmark is that 80% of all economic gains in the housing market currently go to one-fifth of Danish homeowners.
The Danish Tenants Organization does a lot of work to prevent tenants from paying disproportionately high rent for rooms and flats in Copenhagen. But the high demand and limited supply make it tricky, said the organization´s general counsel Anders Svendsen.
“If we look at the last decades, studies from the Ministry of Housing show that rent in the private sector has increased more than the average salaries. In other words, you get less and less rental property for your money,” Svendsen said, referring to an expert survey.
He added that the shift was catalyzed by deregulation in 1992 that introduced free pricing on rent in all new properties. Before, landlords were obliged to offer a cost-based rent price based on the landlord´s actual operating costs and a fixed return.
Svendsen pointed out that the government intended to encourage landlords to invest in new building projects and secure mandatory improvements. Yet, in his view, it has mainly increased the owners´ ability to profit from renters.
The deregulation also introduced the possibility of increasing rent in older properties by as much as 80% if the owner modernized the home by installing a new kitchen or bath.
When asked what the biggest problem is, Svendsen said: “Often, renting isn´t the desired way of living. Many would rather own their property. If you bought a flat in Copenhagen during the 1990s, you are probably a multimillionaire by now. Because renters do not benefit from the market, they should benefit from cheaper monthly living costs. It is only just. But it is not the case in today´s market.”
He warned against gentrification in the bigger cities, as it becomes increasingly harder for people with average wage jobs to afford living there.
In addition to the private renting market, Denmark has quite a few social housing unions offering cost-based and contract-secured rent prices.
On the property market, you can own or buy a flat or a house through so-called cooperatives. However, the latter option has traditionally seen lower profits, as you buy part of a property that belongs to a community, which splits the maintenance costs and takes joint liability for the loan.
In that sense, there are various options for different income groups. But if you ask Simon Halphen Boserup, assistant professor at the University of Copenhagen's Center for Economic Behavior and Inequality, there is no doubt that property owners accumulate wealth faster - mainly because they can profit from the most advantageous investment type under the current tax system.
“A property can be seen as both a consumption good and an investment object. If you compare it with all other investment objects in Denmark, it is the only possibility for gaining a tax-free profit. When you buy stocks, for example, you must pay tax either from the annual dividend or upon selling at a higher price”, Boserup said.
His research has found that housing becomes the dominant financial factor defining a household´s wealth over a lifetime in Denmark, at least if you look at the majority of the broad middle class. And it separates Danish homeowners from families who rent.
“When the housing prices increase more than the average wages, you need substantial savings to enter the market. Either you have made your own money or come from a family with house assets. Or you inherit,” Boserup said.
The Danish housing market is characterized by its state-controlled and regulated mortgage system with very low interest rates, usually 2-4%. It lets new homeowners borrow 80% and sets strict rules for the total loan amount.
Unlike the U.S., where loans with increasing interest rates raise the risk of insolvent owners, the Danish market is relatively safe, said Rasmussen, the housing expert.
However, the tax system makes it difficult to regulate the gains on sales.
“The problem is that we already have an annual land tax and a property value tax, both function as running taxation of your future financial gain. If we implement another tax on real estate property, the same thing is – in theory – taxed twice. Imagine the media frenzy if that became a reality,” Rasmussen said.
Currently, the Danish housing market is starting to show signs of retreat.
In 2024, the government is expected to introduce new property taxes to increase ownership costs and lower the selling price in popular urban areas.
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