Fluctuations and Stability in the Danish Housing Market:

Fluctuations and Stability in the Danish Housing Market


Abstract.


The Danish house prices have been through strong boom and bust cycles the last 30 years. The house price changes are into a high degree explained by the changes in interest payments and in taxes. Denmark has more than 100 years tradition for taxation of owner-occupiers’ imputed rent, but the proceed has followed the house prices and been in a range at ½ to 1% of GDP. At three tax reforms the tax rate for deduction of interest expenses has been reduced. After a slow deregulation and liberalisation the last 10 years the Danish mortgage industry through innovations has created several new products, mostly with short-term interest rates. The net interest expenditure/income ratios for the owner-occupiers have been relatively stable since 1994 and as the interest rates have dropped and half of the debtors had re-mortgaged to adjustable-rate mortgages (with “low” interest rates), the owner-occupiers debt had been increasing. The risk for the owner-occupiers is discussed and is especially linked to their debt. However, the debt had not increased more than the house prices, as the net liability/housing wealth ratios have been nearly stable since 1987. Actually a start to a “bubble” in the house prices is identified. The expectation environment believe on higher rates of increase in house prices than in consumer prices. From 1998 on, the former positive correlation between house prices and the private consumption has been changed, and herd behaviour as well as the new mortgage products are among the possible causes.