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 ($464,000).
“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 (DANSKE), 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. Neighboring Sweden and Norway already are combating rising property prices.
“You see growth again, you see rising home equity again,” Sune Mortensen, divisional vice president at Nykredit Realkredit A/S, 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 $500 billion 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 8.6 percent. That compares with a 4.7 percent increase for houses.
An 80-square-meter (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 20 percent, now risk sending them higher and fueling 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 creation of asset bubbles is a global theme in the current market with lots of liquidity in the financial system and extremely low rates,” he said in an e-mail in response to questions. “The risk will naturally rise as soon as the Danish economy moves into high gear at the same time rates stay low for a longer period.”
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 fueling price increases by holding down the cost of borrowing. Alarmed at a break-away movement in Ukraine, where leaders fear an invasion from Russia in support of the separatists, investors have bought the securities as a haven, according to Danske. That’s pushing rates close to record lows.
Nykredit one-year bonds sold in refinancing auctions this week have yields of about 0.39 percent, nearing January’s low of 0.25 percent, the Copenhagen mortgage bank said this week.
Even long-term rates are plunging to record lows amid investor demand. Realkredit Danmark said on Aug. 15 it would join Nykredit and two other lenders and begin offering a 30-year bond with coupon of 2.5 percent after the price on the secondary market for its 3 percent bond exceeded 100. That means it can’t offer borrowers loans with those terms.
“People are able to borrow more money, so they keep the wheels turning,” said Jacobsgaard, whose parents are helping him and his partner to buy an apartment. “More and more money is being produced, making things more and more expensive, including housing.”
Easy credit during the last decade, including the introduction in 2003 of interest-only loans, drove up Danish property prices to record highs. When the market collapsed in 2008, it brought down 62 banks and left Danish households with the world’s biggest per capita debt load.
While their pension savings also are among the highest, households owed their creditors, mostly mortgage banks, more than 300 percent of their disposable income, according to the latest figures compiled by the Organization for Economic Cooperation and Development. The Paris-based group has urged the country to adopt policies to bring down the debt.
That burden may make consumers more cautious about spending, Mortensen said. Still, families have put away savings and the stock and property markets have risen, making people feel wealthier and raising the likelihood that a lesson of the financial crisis, to be wary of debt, may fade, he said. Already people are discussing flipping apartments, he said.
“It’s a cycle, a household consumption cycle, a mental cycle that when everything points in the same direction, when the economy is improving, people forget quickly,” Mortensen said. “That’s the true danger right now.”
The average, unadjusted sale price for an apartment rose by an annual 6.3 percent in May to 1.93 million kroner, according to the Danish statistics agency. The average house price increased 2.4 percent to 1.92 million kroner.
Jacobsgaard said he and Sally, who’s studying to get a degree to work in theater, 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.
To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at firstname.lastname@example.org