Private real estate investment versus renting and investing in stocks and Danish government bonds

Adam Hersland Powers

Student thesis: Master thesis


Real estate investment has been a popular subject of discussion for the last decade, especially the rather significant increases in the real estate market prices, which have left many real estate owners with notable equities and sales profits. They suddenly became real estate investors, no matter what the original purpose was that initially made them enter the real estate market. This Thesis analyses concludes how profitable real estate investment actually has been compared to rental and investment in stocks and Danish Government bonds – both investors with residence in Copenhagen, Denmark. The comparison is seen exclusively from a financial perspective with different allocations and risk preferences. It all begins with an analysis from the year 1978 and ends with the whole of 2007. The total yearly mortgage net expenses minus the total rental expenses made up the “rental excess capital” that the tenant had for investment each year. Relatively high interest rates, inflation, a heavily rising stock index (with no taxation up until 1993) and no actual growth on the real estate market from as long as 1978 to 1997, gave the then still real estate owner – not yet investor - a hard time during the first two decades. These circumstances also affected the subsequent analysed period from 1985 to the end of 1994. Renting and investing triumphed in both 1978 to 2007 and from 1985 to 1994. However, the suffering real estate market gained strength from 1998 up until 2006. Simultaneously, interest rates declined, which was one of the crucial factors influencing the next two analysed periods from 1995 to the end of 2004 and from 1998 to the end of 2007. In both periods, the real estate investor swept the tenant aside, and an interest deduction adjustment in the latter period only embellished the result. The real estate market dominated from 1995 up until 2006, while the previous decades favoured rental and investment in stocks and Danish Government bonds. If one was to disregard the financial perspective, it is doubtful that many real estate purchases were made purely for this purpose. “Investors” were more likely to want to invest in the feeling of being a home-owner for their own enjoyment, and freedom from rental limitations. The real estate market from 1978 to 1997 experienced no overall increase, and therefore it makes no sense to believe that real estate, exclusively considered as investment, was as prevalent a trend as from 1998 up until 2006. Nonetheless, this Thesis analyses the scenario from a financial perspective.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2009
Number of pages141