MR 2018

43

Copenhagen Property Market Report 2018

Affordability poses a structural barrier

Ownership market, variable interest rate

Rental market

Ownership market, fixed rate

Average household

Postal code District

Couples Average household Couples

Average household Couples

1000-1499 Copenhagen K

67% 39%

62%

36%

44%

25%

2000

Frederiksberg

62% 36%

53%

30%

38%

22%

2100

Copenhagen Ø

64% 37%

54%

31%

39%

23%

2200

Copenhagen N

62% 36%

53%

31%

38%

22%

2500

Valby

57% 33%

44%

25%

32%

18%

2720

Vanløse

56% 32%

43%

25%

32%

18%

Note: Percentage of disposable income allocated towards housing costs. Sources: Statistics Denmark, NASDAQ OMX Nordic, Association of Danish Mortgage Banks and Sadolin & Albæk

The primary dark horse in the market for rental housing seems to be the risk that affordability concerns will significantly curb rental growth. As prime rent levels for a substantial share of newly built flats have reached DKK 15,000-20,000 per month, the risk certainly seems real. We have put together a comparative analysis model that expresses housing cost as a share of disposable income (the housing burden). We analyse comparable rental units of 100 sqm in six key districts across Copenhagen, applying our current market rent estimates. We were also interested in examining the housing burden in the ownership market to see whether it differs a lot from that of the rental market. To calculate the cost, we have applied our pricing assumptions for the districts and the cost of financing under standard assumptions, allowing for the value of tax relief for interest costs on housing loans. We then added expenditures relating to land and property value taxes, allocations to owners’ association and maintenance. We reference two groups: the average household (1.99 people) and couples – the latter representing two adults with and without dependent children. The couples have a significantly higher average income due to dual income and a larger share of families with children, which benefit from seniority compared to the average household. The average household also includes a much greater share of the very large number of students that live in Copenhagen. The table clearly illustrates the significant burden that average households are facing in many Copenhagen districts, especially considering that some districts are characterised by below- average income levels. In fact, using average incomes across all

districts overstates the housing burden in prime locations and understates it in secondary locations. Depending on district and mortgage type, the spread in the housing burden in the rental market versus the ownership market is a high as 25 ppts. The fact that flexibility comes at a relatively high cost dampens the demand from voluntary tenants, and the high burden limits the prospects of rental growth in the market for involuntary tenants. In a historical context, however, the ownership burden is high but not alarmingly so. In Q2 2006, when the housing market was peaking, the housing burden for the then average household was e.g. 88% for a fixed-rate loan in the Copenhagen Ø (Østerbro) district. As the number of high-income residents is growing, we are confident that the prevailing urbanisation trend supports fair increases in ownership prices in all Copenhagen districts.

Abating prime rental growth

1,200 1,300 1,400 1,500 1,600 1,700 1,800 1,900 2,000 2,100

09 10 11

12 13 14 15 16 17 E18

Note: DKK per sqm p.a. Source: Sadolin & Albæk