House prices are falling in one of Europe's most expensive countries – and the UK could be next

House prices have fallen at their fast rate in more than a decade in Denmark, one of the most expensive property markets in Europe – and analysts fear the UK could be next.

In the third quarter of 2022 in Denmark house prices fell by 3.8%.

Denmark is one of the most expensive countries for housing in the EU, in 2021 Eurostat said Denmark is 78% above average.

Prices in neighbouring Sweden have been plummeting, with almost 20% of their value being lost in five months.

Analysts have said the rising costs of mortgages driven by increasing interest rates is the main reason prices are falling.

Some fear a similar pattern could play out in the UK.

What is happening to house prices in Denmark?

House prices were down 3.8% in the third quarter of 2022, the steepest fall since 2011.

This is down 2.1% to the same period in 2021.

The last time this happened in the fourth quarter of 2011 they dropped by 3.6% and in the final quarter of 2008 they fell by 7.8% during the financial crash.

Mira Lie Nielsen, a chief analyst at Nykredit Realkredit, Denmark’s biggest mortgage bank, said in a note reported by Bloomberg: "We expect that both house and apartment prices will drop by about 10% from a peak this summer to a trough in the autumn of next year."

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Why are house prices falling?

The main reason analysts believe this has happened is because interest rates have risen sharply in Denmark.

They are now at 1.75%, which is still low when compared to the UK and US, but Denmark was the first country in the world to experiment with negative interest rates in 2012.

This experiment ended in September when the central bank brought them back into positive figures.

Since then it has increased rapidly and economists expect it to carry on rising.

This has pushed up the price of borrowing which many Danes have grown used to being almost free for a decade.

A similar situation is happening in Sweden where they too used negative interest rates to stimulate their economy.

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One of the reasons the house prices have begun falling so rapidly in both countries is far more mortgages are on variable rates.

Just 8% of UK mortgages are variable but it is the norm in Sweden and Denmark, meaning every rise in interest rates is felt very quickly.

Is the UK heading in the same direction?

Experts believe the UK is heading in the same direction and is only being held off by the large amount of fix-rate mortgages keeping people temporarily protected from the hike in interest rates.

Interest rates in the UK are currently set at 3.5% and the consensus opinion is they will carry on rising for the foreseeable future.

House prices have already begun falling, but not at the rate seen in Denmark and Sweden.

According to Halifax prices fell by 1.5% in December and 2.4% in November.

Kim Kinnaird, director at Halifax Mortgages, said: "As we enter 2023, the housing market will continue to be impacted by the wider economic environment and, as buyers and sellers remain cautious, we expect there will be a reduction in both supply and demand overall, with house prices forecast to fall around 8% over the course of the year."

Similar to the Scandinavian nations the UK experienced a house-buying boom during the COVID lockdown which saw prices peak in August 2022.

But many believe that boom began to end with the war in Ukraine stimulating the inflation crisis that had begun setting in in the UK.

Jason Tebb, chief executive of property search website OnTheMarket.com, said: “All the upheaval – the macro-economic challenges and the chatter around fixed-rate mortgages, which although edging downwards are higher than we have grown used to – will inevitably impact the confidence of the average property-seeking consumer.

“However, people move for many different reasons and that’s not going to change, even if conditions are more challenging.”

But the UK is not Sweden or Denmark, and certain macro economic conditions may mean Britain may avoid some of the biggest decreases in house prices.

Nitesh Patel, strategic economist at Yorkshire Building Society, noted: "The one constant in the housing market – the lack of supply at all stages of homeownership – will remain, which will help to maintain house prices."