After a long stretch of negative news the Danish media are (yet) again reporting in positive terms on the condition of the market for flats in Copenhagen and other larger cities in Denmark.

After a steady stream of negative comments from so-called housing economists and others, it now looks as if they have suddenly been surprised by the development and in some cases even voice their concern of a scenario with prices running out of control.

The cover by the media is based on the fact that optimism has returned in the shape of twelve months uninterrupted price-increases on flats in general.
Thus prices have increased by 14.7% over the last year and are now 18.6% lower (take note) than when the market peaked in the summer of 2006.

Copenhagen has been leading the way in respect of the increase in the sales prices of commonhold flats. A flat with an average size of 85 sqm. sells at DKK 2.060.000 in the capital, equal to a square meter price of DKK 24.200.

At CPM we have for some time voiced our cautious view on only listening to so-called experts’ opinion. Economists apply models, key figures and sophisticated calculations that are based on historic data. In certain cases they even try to forecast by way of prognosis – again with the expected economic development as a starting point.

The property market is not only driven by the macroeconomic development. There are other forces in play and the two most important elements are simply the supply and demand situation and good old fashioned market psychology.

CPM have for a number of years closely monitored the pattern in supply and demand – especially in Copenhagen. These trends do not feature in economists’ evaluation of the market and likewise do regional differences not feature in the overall statistic.

Denmark is split into several zones with markedly different dynamics when it comes to the development in residential property prices, how long time it takes to sell a property etc. It is by now a well-known fact that the outer parts of Denmark suffer from depopulation and thereby a continued urbanization of the larger cities. It is estimated that Copenhagen will experience a net inflow of approx. 12.000 residents this year and those people need a place to live.

On the supply-side another interesting picture is shows up: Housing starts are too low to keep up with demand. The last ten years an average of 1.800 units have been built in Copenhagen per year.

By using 85 sqm. as the average space for a newly built flat a quick calculation shows that approx. 4.000 new units need to be built per year in the next ten years to keep up with the demographic development – more than double the number of units that have been built the last ten years.

It is amongst these facts that convince us that a solid floor will exist under the market and potentially lead to further price increases. It is important to note that we at CPM do not invest in residential property for the sake of price appreciation per se. We invest in properties with a positive inflation indexed yield, but often it turns out that a decent appreciation is crystallized when we decide to exit a property or a portfolio.

In our view the positive development will continue for a number of years in Copenhagen. We do not predict possible future price increases or –fall, but only point out that the market psychology has turned positive, that the supply- and demand-situation are working with us and that we continue to be able to acquire residential property with good locations in Copenhagen at a yield that is two to three times higher than the present Danish 10-year government bond yield.