The Great Housing Divide: How Denmark’s Wealth Inequality Starts with Homeownership

COPENHAGEN, Denmark (CN) — In 2018, the World Bank published a report on housing, mobility and well-being in European Union member states. Denmark was found to have one of the highest housing cost overburden rates in cities.

The report also indicates that landlords are more likely to benefit from overall economic growth because, in general, renters see their salary increase tempered by rising monthly housing costs.

Since then, Denmark has experienced a property bubble, with prices rising 21% since the first Covid-19 lockdown in 2020. As inflation and high interest rates cause experts to predict lower prices By the end of this year, Danish landlords in the biggest cities – Copenhagen, Aarhus, Odense and Aalborg – are still benefiting from strong demand in a market where supply is limited.

That’s according to housing expert Jørgen Munksgaard Rasmussen of Knowledge Center Bolius. He described the dynamic as a “spiral”.

“It is a self-perpetuating spiral that objectively contributes to an increase in wealth inequality. If you bought an apartment in the center of Copenhagen for the price of 1 million DKK [about $140,000] 10 years ago and you sold it for 3 million today, you suddenly have a capital of 2 million. Parents can use leverage to buy apartments for their children in attractive neighborhoods. Thus, investments and the accumulation of wealth accelerate,” he said in an interview.

Still, he pointed out that housing prices have mainly increased in urban areas and provinces, while rural areas have stagnated.

Unsurprisingly, according to government agency Statistics Denmark, the Capital Region tops the most recent list of housing burden rates, calculated by how much of their monthly income a household has to spend on costs. property such as mortgages and property taxes.

Last year housing costs accounted for more than half of landlords’ total wages in Copenhagen. This makes it very expensive to acquire real estate in the city, but it is also a lucrative investment.

Rasmussen explained how a combination of deindustrialization on the one hand and political centralization of state functions on the other has pushed the demand for housing in urban areas to new heights.

“Over the years, we have seen depopulation in outlying areas. It is similar to the development in the United States and the rest of Europe. As we outsource production to countries with competitive wages, local factories have closed, forcing the working class to move to cities to find new jobs,” Rasmussen said.

He added: “And then you have public structural development, where the Danish government brought together police districts, closed small hospitals, abolished counties and moved local schools. This leaves rural districts lagging behind in education and job opportunities, as well as service amenities and cultural offerings.

Copenhagen, the capital of Denmark seen from above. (Thomas Villars Petersen/LLO)

The result of this geographic divide in Denmark is that 80% of all economic gains from the housing market currently go to a fifth of Danish homeowners.

The Danish Tenants’ Organization is doing a lot to prevent tenants from paying disproportionate rent for rooms and apartments in Copenhagen. But high demand and limited supply make it tricky, said the organization’s general counsel, Anders Svendsen.

“Looking back over the last few decades, Housing Department studies show that rents in the private sector have risen more than average wages. In other words, you get less and less rental property for your money,” Svendsen said, referring to an expert survey.

He added that the change was catalyzed by deregulation in 1992 which introduced free pricing on rent in all new properties. Previously, landlords were required to offer a rental price based on the owner’s actual operating costs and a fixed return.

Svendsen stressed that the government intends to encourage owners to invest in new construction projects and obtain mandatory improvements. Yet, according to him, it has mostly increased the ability of landlords to profit from tenants.

Deregulation also introduced the possibility of increasing the rent of older properties by up to 80% if the landlord modernized the house by installing a new kitchen or bathroom.

When asked what the biggest problem was, Svendsen replied, “Often renting isn’t the desired lifestyle. Many prefer to own their property. If you bought an apartment in Copenhagen in the 1990s, you’re probably a multimillionaire by now. Because tenants are not taking advantage of the market, they should benefit from a lower monthly cost of living. It’s just. But this is not the case in today’s market.

He warned of gentrification in big cities as it becomes increasingly difficult for people in middle-wage jobs to afford to live there.

In addition to the private rental market, Denmark has a number of social housing associations offering cost-based and contract-guaranteed rental prices.

In the real estate market, you can own or buy an apartment or a house through cooperatives. However, the latter option has traditionally yielded lower profits because you buy part of a community-owned property, which shares the maintenance costs and takes joint responsibility for the loan.

The small Danish port town of Bogense has around 4,000 inhabitants. (SDU Rural Research Center via Courthouse News)

In this sense, there are various options for different income groups. But if you ask Simon Halphen Boserup, assistant professor at the Center for Economic Behavior and Inequality at the University of Copenhagen, there’s no doubt that property owners accumulate wealth faster, mainly because they can take advantage of the kind of most advantageous investment under the current tax system.

“A property can be considered both as a consumer good and as an investment object. If you compare it to all other investment objects in Denmark, this is the only possibility of making a tax-free profit. When you buy shares, for example, you have to pay taxes either on the annual dividend or on the sale at a higher price,” Boserup said.

His research revealed that housing becomes the dominant financial factor defining a household’s wealth over a lifetime in Denmark, at least when considering the majority of the wider middle class. And that separates Danish landlords from renting families.

“When house prices rise more than average wages, you need substantial savings to enter the market. Either you made your own money or you come from a family with real estate. Or you inherit,” Boserup said.

The Danish housing market is characterized by its state-controlled and regulated mortgage system with very low interest rates, typically 2-4%. It allows new owners to borrow 80% and sets strict rules for the total loan amount.

Unlike the United States, where loans with rising interest rates increase the risk of insolvent homeowners, the Danish market is relatively safe, said Rasmussen, the housing expert.

However, the tax system makes it difficult to regulate gains on sales.

“The problem is that we already have an annual property tax and a property value tax, both of which operate as a running taxation of your future financial gain. If another property tax is introduced, the same thing is – in theory – taxed twice. Imagine the media frenzy if this became a reality,” Rasmussen said.

Currently, the Danish real estate market is beginning to show signs of decline.

In 2024, the government is expected to introduce new property taxes to increase ownership costs and lower the selling price in popular urban areas.

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