Results

Finally, I want to wrap the fundamental section up with a brief overview of the findings for all fundamentals.

The overall real estate market has increased quite a lot in real terms since 1992 and the apartment market has outperformed the housing market for the last 10 years. This is due to an increased price pressure on apartments in the bigger cities of Denmark. The real price level in the real estate market was at an all-time

44 high in 2020 but I do not see this as a sign of danger. However, the apartment market in Copenhagen has increased more than in the rest of Denmark, which could potentially become an issue in the future.

Inflation was quite volatile from 1992 until 2020, with the highest inflation rates just before the financial crisis and an all-time low inflation rate in 2016. Denmark has seen an average inflation rate of 1.4% from 1992 until 2020. The inflation rate influences the nominal real estate prices but not the real prices as they were adjusted for inflation. In terms of risk signs, I do not see anything dangerous in the inflation rates at the moment.

The real GDP development from 1992 until today has been positive with only a minor decrease during the financial crisis. The real estate market prices are positively correlated with real GDP growth rate. As with the inflation rate, I do not see any clear danger signs in terms of bubble tendencies in the GDP growth.

The real interest rate has shown a decreasing trend from 1992 until 2020 with a small increase around the financial crisis. Both the short-term and long-term interest rates have converged slowly downwards. The gap between them was narrowest around the financial crisis, which was a sign of recession. Today, this gap is larger in size compared to the years between 2007 and 2010.

The development in the real estate prices is negatively correlated with the interest rates because when the interest rates decrease it becomes cheaper for people to borrow money, which leads to falling real estate prices. Both the short-term and long-term interest rates are at an all-time low level, which supports a healthy real estate market. Hence, I do not see any danger signs here, either.

Unemployment has been volatile over the years. From 1992 until 2008 there was a healthy decreasing trend until the financial crisis ended this. From 2008 until 2013 unemployment increased and shortly afterwards it started to decrease again. The development of the unemployment rate is negatively

correlated with real estate prices. The low unemployment rate which is seen in 2020 is a sign of a healthy society that supports the real estate prices. Hence there is no sign of a bubble here.

Real disposable income has shown a constant and positive trend from 1992 until 2020. Only a minor decrease occurred when the financial crisis began. Hence, this variable looks a lot like the real GDP growth.

Real disposable income is also positively correlated with the real estate prices and I do not see any signs of danger in this fundamental at the moment.

The consumer trust index is the most volatile variable from the fundamental analysis. It went up and down from 1992 up until 2020. However, most of the variation is as expected. This variable is positively

correlated with real estate prices. The effect of the coronavirus on consumer expectations has been dramatic. People were very afraid at the beginning as they expected a slow economy. However,

45 expectations went up again in the last part of the second quarter of 2020. It is clearly one of the

fundamentals that does not back up the real estate market at the current moment. However, if the positive development continues, it will in the future.

Building costs is the third variable that looks like the real GDP growth. It has increased throughout the whole period with only a small drop shortly after the financial crisis. Hence, it is positively correlated with the prices in the real estate market.

In relation to the building costs, the Tobin’s Q evaluation showed that there was a spike in the ratio in recent years in the apartment market. This was especially the case in Copenhagen, where the prices are outperforming building costs significantly. These spikes are something that people need to be careful about as a too-high Tobin’s Q ratio can indicate a potential bubble in the future. This was what we saw during the last financial crisis.

The population development shows that there has been a stable increase in Denmark from 1992 until 2020.

Most interesting was the fact that Copenhagen has had larger population growth compared to the average growth in Denmark. This is assumed to be an indication of why apartment prices have increased more than housing prices in the last ten years. The increasing population has a positive correlation with the real estate prices. The development has been healthy, and I do not have any worries about it in terms of a potential bubble.

The user cost showed a minor decrease over the years as it was affected by the lower interest rate. Hence, it is negatively correlated with real estate prices.

On a national level, most of the fundamentals support the positive development the real estate market has experienced for several years. However, one must pay close attention to the development in Copenhagen as some of the fundamentals are in favor of an overheated apartment market right now. The development in building costs relative to the real development in apartment prices is especially interesting. At present, it is highly favorable to keep on building apartments. However, if the market becomes oversupplied at some point this will affect the prices in the long run. In addition, the consumer trust index is very pessimistic at the moment which of course is due to the global pandemic. If this pandemic continues for a long period, it will most likely affect the prices in the real estate market as well.

Nevertheless, at the moment, the market seems to be healthy and is supported by the historical development of its fundamentals.

46