When I tell people that I’m currently planning to invest in a real estate project (rental property), their immediate reaction is: *But real estate have become so expensive (again), are you sure this is the right time to go into real estate?!*

This is the typical reaction, because people look at graphs of the real estate prices, which have only gone one way since 2010 (the same way as the stock market) – UP! – And they then conclude that real estate is expensive. Which of course is also relatively true – but what if we factor in the price of borrowing money – also known as, the interest rate?…

**Join me, in a quest to discover, if real estate (in Denmark) is currently expensive (or not)…**

I apologize to my international audience that what you’re about to see is primarily of interest to Danes. I have not been researching the international housing market, as I assume there’s going to be some local fluctuations. However, I suspect that you’ll be able to see a similar trend in house prices / interest rates in countries that are similar to Denmark (I encourage you to check it out – and let me know whether it’s the case or not ðŸ˜‰ ).

**The big question on everybody’s mind at the moment is: IS there a real estate bubble in Denmark!?**

Let’s have a look at some numbers! Below is a graph depicting the 30 year mortgage interest rate in Denmark since 1997. The **RED** line is the condo prices and the **BLUE** line is the house prices (single-family houses).

The **GREEN** dotted line is my attempt to depict the trend of the interest rate, since Q3-2008 (which is widely regarded as the beginning of the financial crisis – starting with the collapse of Lehman Brothers) the interest rate has been in a steady decline. It peaked in Q3-2008 at more than 7%. It has since been in a downward trend, and is currently bottomed out around 2%.

Looking at the **BLUE**Â line, lets now imagine that I bought a house in Q3-2009 (I actually did! – But we could also say, just for the sake of argument that I bought it in Q3-2011, as the price and the interest rate appear to be comparable at these two particular points in time – notice the vertical black dotted line here – it’s so we can clearly see the interest levels where the blue line dips below the 100% price index). This particular time is interesting, because this is where the price index is right around 100%. Since then, the price of single-family houses has been on a bit of a rollercoaster ride – but notice how it since Q3-2012 has been in an upward trend.

So now is where it gets interesting! **In Q3-2009 I bought a house. I paid DKK 2.000.000 (â‚¬266.000/$308.000) for it** (this is a true story!). **My interest rate at that time was 4.75%** (I think it was actually 5% – but remember the graph is a country avg). I sold the house again in Q3-2017 (also true!). By then, it had appreciated in value (by 20% – look at the blue line) so I sold it for DKK 2.400.000 (â‚¬320.000/$370.000) (I actually sold it for DKK 2.600.000 – but again, the graph depicts the country average, so local fluctuations must be expected).

**Now, lets imagine that I bought the house inÂ Q3-2017 instead! The price for the same house is now DKK 2.400.000** (20% more than I paid in Q3-2009). – But, the interest rate is now less than HALF of what it was in Q3-2009. Do you see, where I’m going with this?…No? Lets look at my 30 year mortgage payments in the two “examples”:

Q3-2009 (Lower price, higher interest rate) |
Q3-2017 (Higher price, lower interest rate) |
|||

Purchase price |
2.000.000,00 | Purchase price |
2.400.000,00 | |

Down payment |
200.000,00 | Down payment |
200.000,00 | |

Interest rate |
4,75% | Interest rate |
2,00% | |

Terms per year |
4 | Terms per year |
4 | |

Years to repay |
30 | Years to repay |
30 | |

Payment/per termin |
28.219,16 | Payment/per termin |
24.424,51 | |

Total interest payments |
1.586.299,19 | Total interest payments |
730.941,25 | |

Yearly interest rate (APR) |
4,84% | Yearly interest rate (APR) |
2,02% | |

Total amount to borrow |
1.800.000,00 | Total amount to borrow |
2.200.000,00 | |

Total amount repaid |
3.386.299,19 |
Total amount repaid |
2.930.941,25 |

**Tadaaaa! A difference of more than DKK 450.000 (â‚¬60.000/$69.000) over 30 years – in favor of the “expensive house” with the low(er) interest rate.Â **Looking at the interest payments alone, there’s a difference of more than DKK 850.000 (â‚¬113.000/$130.000)! Now you can ask yourself: who would you rather hand DKK 400.000 (â‚¬53.300/$61.500)? The bank, or a fellow countryman (The guy you buy the house from)?…

**Of course this is merely a theoretical example**, as nobody in their right mind (I hope) would still be paying 5% interest on their loan. You would have converted it to a 2% by now. ~~– Of course this conversion is not free, because the value of the bond behind your loan depreciates when the interest drops. It will (typically) lose up to 7% in value per. 1% the interest drops (this is for the 30-year loans in DK). So you’re looking at a 21% loss (or price) to convert your 30-year mortgage from a 5% loan to a 2% loan.~~

Let’s imagine that you’ve paid off a small part of your loan (in the example above). The interest has dropped to 2%, so now you want to convert your loan. If you still owe DKK 1.500.000 the “interest swap” is going to cost you DKK 300.000 (â‚¬40.000/$46.000) alone (plus fees to close the old mortgage and open up a new one).

This dynamic is of course also present, if the interest rate rises – but then you can earn a bonus by (up)converting instead! If you have a 2% loan and convert to a 5% loan, you’d shave off 21% of your mortgage by making a conversion. Depending on how many years you have left on your mortgage, this can be a potential golden opportunity laying ahead for the home owners with 2% mortgages, should the interest rate once again rise to 5% (or more…).

**So, NO! – The house prices are not expensive (in a historical perspective)**. If you also factor in the inflation, it’ll paint an even clearer picture! (lets not though – that’s too much of a hassle!).

Looking at the graph it’s quite clear that this scenario is only the case (currently) for single-family houses (the blue line). – If we instead turn our eyes towards the **RED** line, which is the condo-prices, it becomes clear that it’s not the same case here. Here you’d still pay a premium (over 30 years), if you buy a condo now (compared to buying it 10 years ago).

**But! This graph unfortunately does not include 2018** – and there’s currently an interesting development going on, in the condo-prices in the bigger cities – they’re stagnating, and are even starting to drop in some (edit: most) areas! Don’t take my word for it, though! Look at this map from some of the most expensive areas of Copenhagen (condos for sale today):

**The little red arrow on the listings indicate a price drop.** I had heard rumors that the prices were starting to stagnate in Copenhagen, but I was actually a bit surprised myself to see that they are actually dropping hard across the board at the moment! – And this is not only the case for the inner city. Check out if we zoom out (you wont be able to see the little red arrow, so all the blue dots are condos that have had their price reduced within the last three months):

**Looking at this was actually quite the eye-opener for me…The downturn has begun indeed**. It always starts with the condos in the big cities, and then it spreads to the surrounding cities, and then the house prices in the suburbs starts to decline too. However, as you’ve seen from the graph above, the condo prices have kind of been running amok for the last decade, so perhaps it’s really just a well-deserved adjustment, to bring it down to more reasonable levels.

As long as the interest rate remain (historically) low, I don’t believe that we’ll see an actual housing-crisis (like we saw in the wake of the 2008 crash). The house prices have not developed in the same steep fashion as the condos, and the curve is certainly not as steep as we saw leading up to the crash in 2008. **I believe that the condos were overpriced, so a correction was imminent**. Now time will tell, if the “market psychology” will bring down the house-prices as well…

If you’re in the market for a house – then I wouldn’t hold off on buying one, based on the current prices (and the interest rate!). If you’re looking for a condo on the other hand, I’d give it a year or two – but make sure to keep an eye on the interest rate! If the prices doesn’t find a new supporting level before the interest rates starts to go up – we could have quite the rollercoaster ride ahead of us!…

But Nick, aren’t you in the market for buying an entire building…With a bunch of condos in it?!

Yes! That is an excellent point! To be honest, I’m still undecided whether the time for buying a building is right or not – but it’s important to know that the market for condominiums are not necessarily directly linked to the price of the individual condo. This sounds utterly stupid – of course there is a link, but the market forÂ condominiums are simply smaller, than the market for individual condos – and thus the supply/demand is making the price less volatile forÂ condominiums. Ideally, buying a building with 10 apartments should be 20-30% cheaper, than buying 10 individual condos. However, in the big cities, this is not always the case! In fact it’s often seen that buildings at “prime addresses” are priced 20-30% higher, than if you just bought the individual apartments within the building! This dynamic is important to keep in mind, when looking at rental properties (apartment buildings/condominiums).

**Aaaanyway, the all-important factor here, is the interest rate.** If you can afford to pay a 10-20% premium to buy a house/condominium now, and only pay 2% on the mortgage for XX amount of years – I’m certain it will be a good investment in the long run, regardless of the (expected) rollercoaster prices in the coming years. So, the trick now will be to hit the sweet spot where the prices are down, but the interest rate remain at the same (low) level. I predict that we’ll see this being the case for 2019. – In two years time however, it’ll be more uncertain. – I don’t want to predict the interest rate in two years from now! ðŸ˜‰

Do you remember this graph from my night out with Imbro?

I just now realize that this might be a bit manipulative, as the **GREENÂ **line on the graph depicts the 10-year variable interest rate – not the fixed interest rate, which would be (as we see on the first graph) 2%, making the gap between the starting yield and the interest rate a lot smaller. – However, Imbros projects are financed with a double-mortgage with 50% in fixed and 50% in a variable (10-year) interest rate loan. So in reality you’d probably pay around 1.5% in interest, making the gap about 2%. – Still pretty good, as this is the starting yield (the black line). The yield will go up over time, as the debt decreases.

So, in conclusion:

Houses: no! Condos: yes! Condominiums: It depends! ðŸ˜›

**What do you think? Hit me up in the comments below!**

Sources:

https://uvildige.dk/boligpriser-priserne-paa-ejerlejligheder-er-stukket-af-hvorfor-og-hvad-nu.aspx (In danish)

https://www.boliga.dk/kortsoegning (Map of listings – also in danish)

With fixed rate mortgage loans the price of the bond goes up when interest goes down, but the bond can always be redeemed at 100 even if the price is well above. So the conversion from 5% to 2% is actually quite favorable.

Hi Morten,

thanks for reading (and commenting).

You’re absolutely right ðŸ˜‰ I’ve edited the original post to clear out that confusion ðŸ˜‰

I’m not sure how I got that idea into my head – but since you (apparently) are always able to redeem the bond at course 100, I don’t understand how some people still have 4-5% mortgages ðŸ˜‰