Sunday 25 February 2018

Danish apartments pass out house prices, and bubble worries increase

Frances Schwartzkopff

IT was just as well that the apartment Martin Jacobsgaard and Helene Sally were looking at didn't have easy access to a backyard. Otherwise, saying no would have been harder.

For the couple, who have a 17-month-old son and a baby on the way, the three-bedroom apartment in a quiet residential area just south of downtown Copenhagen was almost perfect, save for the backyard. And the price, which was out of their range: 2.6 million kroner (€380,000).

"We loved the location, the size was really good, bigger than most we've seen," said Jacobsgaard, a 38-year-old officer in the Danish Navy. "But it was also the most expensive."

Danish apartment prices have climbed almost twice as fast as house prices in the past 12 months, led by increases in Copenhagen, according to the country's statistics agency. Never before have apartment buyers gotten so little for their money compared with house buyers, according to Danske Bank A/S, the country's largest bank and parent company of its second-largest mortgage lender.

That's stoking concern among buyers and lenders that Denmark may be on the verge of entering another period of runaway increases just as the Scandinavian economy emerges from the rubble of the last burst bubble. Neighbouring Sweden and Norway already are combating rising property prices.

"You see growth again, you see rising home equity again," said Sune Mortensen, divisional vice president at Nykredit Realkredit, Europe's biggest issuer of mortgage-backed covered bonds.

"When we saw that the last time, people lost their minds and their good sense."

Apartments have served in the past as an indicator for the direction of the $500bn Danish covered-bond market, the world's biggest per capita. In May, the Danish statistics agency's apartment index, which adjusts for factors such as size, jumped an annual 8.6pc. That compares with a 4.7pc increase for houses.

An 80-square-metre (850-square-foot) apartment now costs the same as a 140-square-meter house, according to Christian Heinig, chief economist for Realkredit Danmark, the mortgage unit of Danske Bank. That's a first, according to Heinig's analysis.

Low interest rates, which restricted price drops after the market's 2008 collapse to an average of 20pc, now risk sending them higher and fuelling a second bubble, especially in the Copenhagen area, Heinig said. It's a reflection of what's happening worldwide amid record-low central bank rates, he said.

The Danish central bank said in a June report that while there's no sign of low rates destabilizing the financial system, a close monitoring of conditions is "important." Denmark's financial regulator will announce new lending guidelines for mortgage banks later this year.

Copenhagen's housing market is under pressure from other factors as well.

Households are shrinking in size, according to statistics agency figures, and student housing is in short supply, prompting parents to buy apartments for their children.

Emilie Spiegelhauer, a 22-year-old student at Copenhagen University who's looking with her parents for an apartment in the city, reckons a bubble is well on its way. Spiegelhauer said she's staying away from downtown area and sticking to the suburbs, where prices are almost a third lower.

"You can get more for your money when you get out of the city," Spiegelhauer said after viewing an apartment in Virum, north of Copenhagen.

In the city, "you get nothing for your money and you have to bathe in your sink," she said. "That's not very nice."

Demand for Denmark's highly rated covered bonds, which fund virtually all mortgages, may inadvertently be fuelling price increases by holding down the cost of borrowing.

Investors have bought the securities as a haven, according to Danske. That's pushing rates close to record lows.

The average, unadjusted sale price for an apartment rose by an annual 6.3pc in May to 1.93m kroner, according to the Danish statistics agency. The average house price increased 2.4pc to 1.92m kroner.

Jacobsgaard said he and Sally are now looking for cheaper apartments and have made a bid on one. It wouldn't have been possible without his parents' help, he said.

"We'd have to just keep on renting," he said. (Bloomberg)

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