An Analysis of the Danish Owner-occupied Housing Market

Robin Gosvig Kristiansen

Student thesis: Master thesis


In 2007, Denmark experienced a housing market crisis which caused a large drop of the housing prices. Before that point, average housing prices was at the highest level ever recorded. In 2012 average real housing prices started to increase after several years of decreasing housing prices. This have led to an ongoing discussion of the sustainability for the current level of housing prices, since housing prices are at a high level when compared to the long-term average. This thesis analyses the development in Danish housing prices and the underlying fundamentals to examine whether the current price level in the Danish owner-occupied housing market is sustainable. Several aspects of the Danish housing market are analysed to examine this subject. It is found that yearly real housing prices is an AR(4) process, where the long-run equilibrium is determined by the underlying fundamentals. Several fundamentals support a high level of housing prices. Especially the interest rates are analysed in depth. It is seen that both the short-term and long-term interest rates have decreased for a long time and many researchers think that this is one of the main reasons for the current high level of housing prices. Due to the importance of the interest rates towards housing prices proven by a regression, a sensitivity analysis is made. The analysis shows that an increase in the interest rates of 1%-point is relatively insignificant for the owner-occupiers while an increase at 5%-points will make a larger impact. Overall progress in the Danish economy reduces the impact from an increase in the level of the interest rates. The introduction of adjustable rate mortgages, interest-only mortgages and the freeze on property value tax supports a high level of housing prices. If these are regulated it can result in a significant drop in housing prices. The level of housing prices is further compared with income, cost of renting and construction costs and in accordance to these ratios the overall finding is that housing prices are a bit overvalued in the long-run. Due to the support of several fundamentals, the current level of housing prices is sustainable in the short-run, though it is concluded that housing prices should decrease in the long-run.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2016
Number of pages87
SupervisorsJens Lunde