How to Avoid a Housing Bubble in Denmark?

Abstract

The development in the housing market since the Covid-19 outbreak in the spring of 2020 have surprised analysts, economists, and ordinary Danes. According to several forecasts by the country's largest mortgage banks, the expectation is that prices for both houses, owner-occupied flats and holiday homes will rise further in the coming years. It has been seen before that large increases in house prices over a long period of time have serious societal consequences. For example, in the years leading up to the financial crisis of 2008, house prices exploded, creating a bubble that suddenly burst. Then house prices plummeted, and many Danes lost millions. I have chosen to investigate how the development in the housing market in the near future can be regulated and whether it is necessary to be regulated, so that a housing bubble is avoided. I have investigated what tax tools and other measures can change the population's behavior, so that the rise in house prices is dampened. There are different views on whether it´s needed to regulate the housing market or not, depending on who you ask. First-time homebuyers may have an interest in regulation, while investors and mortgage lenders are likely to have less interest in extensive interventions. I have therefore chosen to look at the problem from both a societal perspective and from the perspective of first-time homebuyers. The theoretical part of the thesis will give the reader an understanding of price formation in the housing market as well as the factors that influence it. In addition, the theory section reviews the legislation that has an impact on the housing market. The analysis part of the thesis is looking into the current situation in the housing market, the connection between the relevant theories and the development in the housing market, including the consequences of this development for first-time homebuyers as well as the society. In addition, the analysis will provide answers to how a possible intervention in the housing market will affect society and first-time homebuyers. I have chosen to supplement my study with three interviews - two of them with housing analysts and one with a politician, who have a legislative power due to his position as a Member of the Danish Parliament. In my thesis, I have concluded that advancing the new housing tax reform will be the best intervention to avoide a housing bobble from the perspective of first-time homebuyers. The intervention does not affect first-time homebuyers more than anyone else. On the contrary, this intervention will result in falling prices as soon as it is adopted. It is therefore my recommendation the reform to be adopted in its current form as soon as possible, so that home buyers can take into account the coming increase in taxes and thus push prices down. My recommendation regarding an effective intervention in the housing market from a societal perspective, is to tighten the rules for interest-only loans in the growth municipalities further, so that the risks associated with this type of loan are minimized. It is also my recommendation that the list of growth municipalities be expanded to include Aalborg, Odense, Rudersdal, Alleroed, Furesoe, which on a large scale have also experienced significant increases in housing prices the last two years.