House prices and investments increased at a fast pace in Denmark until the mid 2000s.
Following interest rate hikes through end-2008 and the escalation of the financial and economic crisis, housing market developments went into a sharp reverse, but now appears to have stabilised. To explain these developments we derive and estimate a traditional demand-supply housing model. Our multivariate econometric analyses and simulations indicates that house price developments during the upturn were in line with fundamentals and the unusually strong price appreciation between 2004 and 2007 was propped up by mortgage rates falling well below historical levels. Moreover, the price peak in the recent upturn appears not to be overly different from previous upturns when measured relative to an estimated equilibrium value. We find that both house prices and investments mid 2010 were close to their estimated equilibrium value. Given plausible scenarios for mortgage rates and economic activity our model predicts that real house prices continues to stabilize during 2010 for then to start appreciating, while housing investments may soon start to bounce back at a non trivial pace.
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