What prospective homebuyers in Denmark can expect in 2024

The upcoming changes to Danish property tax rules means that from next year, property tax will be based on new appraisals of land and real estate values..

The basis for property taxation in Denmark relies on public real estate appraisals. Recent appraisals have generally shown higher property valuations than those from 2011 and 2012, mainly due to rising housing prices in the past few years. As a result, new rates will be applied once the new valuations come into effect.

According to the Danish tax authorities, most homeowners will see lower taxes as a result of the new rules. However, to shield all homeowners from higher property taxes due to increased valuations a subsidy will be applied to properties which see their calculated rates go up.

Existing homeowners will thus not experience higher property taxes in 2024 compared to what they would have paid under the current rules.

However, this tax subsidy doesn't apply to new homeowners from January 1st, 2024, putting pressure on first-time buyers - and prompting a surge in housing sales in the run-up to the new tax framework.

The allure of a "tax discount"

The upcoming changes have already had visible repercussions in Denmark's housing market.

According to an analysis by Finans and Nykredit, apartment prices in major cities would need to decrease by around 5-10 percent after the New Year for new buyers to maintain their total costs (mortgage plus tax) at a level similar to the existing rules.

READ MORE: Why this might not be the best time to buy property in Denmark

Furthermore, apartments are more likely to see tax increases under the new rules due to the valuation appraisal system, which had previously subjected them to lower property taxes compared to houses.

Some prospective buyers, especially those looking for apartments in major cities like Copenhagen, Aarhus, and Odense, are trying to enter the housing market before the end of the year in an attempt to get a "tax discount."

In a November press release, Boligsiden's housing economist and communications director, Birgit Daetz, highlighted how the impending property tax change had prompted a surge in housing sales.

Daetz explained, "If you buy and take over an owner-occupied flat before the end of the year, you can get a tax discount, which means that property taxes will not increase more than if the current rules continued. And that tax discount is maintained until the day you sell and move from the apartment."

The anticipation of this tax benefit had already driven property prices upward by mid-November. For instance, according to Boligsiden, a 59-square-meter, two-room apartment in Nørrebro had appreciated by 100,000 kroner since July and 250,000 kroner since April.

However, those who buy during this period may end up losing more when property values drop after the tax discount disappears.

Rising mortgage interest rates

In addition to the property tax changes, Danish homeowners with certain types of mortgages will face higher payments starting January 1st, 2024.

Denmark's mortgage model involves banks financing loans through covered bonds. This system means that borrowers in the country know precisely which covered bond was issued to fund their loan.

READ MORE: How much more will mortgages in Denmark cost next year?

Mortgage bond auctions by Totalkredit and Realkredit have set significantly higher interest rates for one-year, three-year, and five-year fixed mortgages.

For example, the interest rate for a one-year fixed mortgage will be 3.88 percent, while three-year and five-year rates will be 3.39 and 3.37 percent, respectively. These rates are the highest since the international financial crisis in 2009.

As a result of these rate increases, homeowners in Denmark with existing three-year or five-year mortgages will see significant jumps in their monthly payments.

Those who switch to one-year fixed loans may initially save on interest but could face higher costs in the long term.

Danish analysts suggest that rates may have already peaked, and they anticipate payments remaining stable or even decreasing by 2025.

First-time buyers in a bind

In July 2023, the situation for first-time home buyers in Denmark, particularly in the broader Copenhagen area, was notably challenging.

The decline in housing prices, which reached nearly 15 percent in Copenhagen, was not sufficient to offset the increased costs brought about by higher interest rates.

This scenario placed first-time buyers in a difficult position despite significant wage increases in Denmark that triggered optimism early on in the year.

Lie Nielsen, Nykredit's chief analyst, told The Local at the time that the property market in the capital was particularly challenging.

On one hand, Nielsen suggested that the conditions for first-time buyers might not change substantially in the short term. On the other, the analyst advised that if people could afford to buy and find the right place, they should proceed with the purchase.

As of December 2023, it's important to reevaluate this advice in the current context. Market conditions and interest rates have shifted to an extent in the past several months.

Unfortunately, they haven't substantially altered the landscape for first-time buyers.

The temporary demand spike and rising prices, especially in Copenhagen's real estate market (and the market in several other major Danish cities), mean that first-time buyers remain in a sticky situation, further exacerbated by high interest rates and anticipated tax changes.