Denmark- Selected Issue, IMF Staff Country Reports

Recent house price developments in Denmark have been characterized by a growing divergence between different parts of the country, with big cities such as Copenhagen and environs experiencing much more rapid price increases than other parts. This paper examines the factors contributing to this price divergence. In an empirical analysis, municipal-level data are used to estimate the equilibrium house price level for each Danish city the level explained by economic fundamentals—and to infer the extent to which municipal house prices may be overvalued or undervalued. The analysis points to emerging overvaluation in Copenhagen and Frederiksberg’s housing markets, particularly in the market for owner-occupied flats. The large difference in regional price trends may call for regional differentiation in macro-prudential and other housing policies to address housing market risks. There is a large divergence in house price patterns across Denmark. Following a large price correction after the 2006–07 housing boom, house prices started to recover in the Copenhagen region in early 2012, whereas in other regions (e.g., North and East Zealand) prices have started rising only recently. The average real price per square feet of housing  in Copenhagen municipality increased by about 43 percent between 2012Q1 and 2015Q3—approaching its peak compared to just over 11 percent in the median city. Over the first three quarters of 2015, prices also increased robustly in other major municipalities (e.g., Frederiksberg and Aalborg).The market for owner-occupied flats is generally seeing larger price increases compared to that for single-family homes—partly as flats are relatively concentrated in big cities. However, there is a wide distribution of price growth across the country, with some municipalities experiencing price declines and sluggish turnover, creating a `multi-speed’ housing market (Dam, Hvolbol, and Rasmussen, 2014; Pedersen and Isaksen, 2015).