The sound of the popping bubble: A bit about psychology and Copenhagen's housing market


by Tim Anderson (timothyanderson2005@gmail.com)


anybody selling...

Money is always an exciting thing to have dangled in front of you. Especially if, like me, you don't really have much of it. If you're buying or selling a property in Copenhagen (or elsewhere), this may help you make a bit more money and a bit faster, or maybe spend a bit less.

When a bubble pops, it's gone. Something to take to heart when the bubble in question happens to encompass a lot of cold hard cash. I'm talking about the billions of kroner in value that has been sheered off of the (supposed) value of houses and apartments across Copenhagen over the past few months. The housing market in Copenhagen, you see, has turned.

To be clear about my view on things, it is highly unlikely one will lose money in the long term in housing in any major city, especially Copenhagen - perennial destination of choice in Denmark. However, in the short term, this may not be the case. Then it's more about
psychology and knowing when to make the right deal.

Psychology plays a surprisingly big role in things.

Buying and selling an apartment is ultimately a matter of deal making. Good dealmakers know how to harness (and overcome) the forces of psychology. That means leaving as much emotion aside as possible (or turning it to your advantage), taking a somber look at the prevailing tide, grasping just where things are heading, and tempering actions appropriately. Of course, emotions matter, you just can't let them run wild - especially if your view is a short term one. This is, of course, not exactly easy when the issue in question is a home.

So we have the case of the Copenhagen apartment buyer (of course, this story applies all over the western world).

About a year and a half ago, I discussed Copenhagen's complicated housing situation in an article (Closing Time In Copenhagen (Part 2): The Housing Situation). Among other things, I noted that housing prices had been rising at a wildly unsustainable rate (a rate that was well above what official statistics suggested).

For at least 18 month (up until mid-2005), the average apartment in Copenhagen had been rising at around 20,000 kroner (2000 euro) per month. In fact, this had been the case for several years, however the zenith was this final 18-month period.

To give some perspective on that number, this amount is a little above the average after tax monthly salary in Copenhagen. In other words, you could make the same amount on your house each month as you could by going to work. You don't need to know anything about interest rates and so forth to realise that this was just not a sustainable situation.

Ah, but how times change.

A brief digression. A few years ago, I had an unlikely job selling private jets (really), and here I learned a lot about buyer and seller behaviour and long-term market trends and patterns. Some day I hope to actually use this knowledge to make some money for myself, for now I can only share it. The private jet market mirrors the economy as a whole, and it also mirrors the typical behaviour of the housing market.

When prices rise, they do so for a number of years. And as they rise, the number of properties for sale drops. At the peak of the market, there are very few properties for sale. So a good way to get an idea of where the market is at, is to look at a long term chart showing the number of properties for sale (each month).

Then the market turns (though few realise it until months after it has happened). When the number of houses for sales begins to rise consistently, the market has already turned, even though few will realise it at this point - of course there can be a few false turns before the real one.

When the market turns, it's not simply a matter of dropping your asking price to match the market. It's more a matter of praying somebody falls in love with your place. You see, inevitably at this point, there are NO BUYERS (or at least
far less buyers than there are sellers). So it also helps to have a long term chart showing a rough figure for the monthly number of apartments sold, as well. When it starts dropping consistently, that is the other indication that the market has turned.

A drop in monthly house sales is exactly what is happening in Copenhagen right now. A recent article in The Copenhagen Post noted that housing sales in Copenhagen decreased by 40% in 2006. FORTY PERCENT! That's a lot of panicking real estate agents, you can be sure, and a lot of sellers wondering why it's taking so long to get their place sold.

Why are there suddenly so few buyers?

Good question. You see, previously people just bought a new property, knowing that with prices rising and lots of buyers, it would be no problem to sell their old one later.
With a shortage of buyers and prices dropping, people suddenly find themselves stuck with second properties they are trying to sell for a lot longer then they want to have them, and as more and more people begin waiting to sell before they buy (because they can see the market is dropping), the situation is compounded. That they are waiting to sell before buying is indeed a big change, hence (the often rather sudden) lack of buyers in the market.

A friend who is an estate agent in Copenhagen, and whom I have spoken to over the years about the real estate market in Copenhagen, confirmed that currently around
50% of apartment sellers in Copenhagen already own a second property. That's a lot. It happens when people get caught as the market turns.

Typically, these sellers make a second big mistake. Shortly after putting their property for sale, they may receive one or two serious offers from buyers, but at a much lower price then they expected to sell for. Inevitably, they reject these, not realising these will be the last offers they will be receiving for quite some time. It's an avoidable situation, but the best response to it requires a significant mindset shift - a psychological issue - and of course knowing what signs to look for in order to know that the market is indeed turning. Hence why getting ahold of an up to date chart showing the number of properties for sale over a few year period (in your region) can tell you a lot - both as a buyer or seller.

Those who are clever in this way and can see the trends, may be able to overcome their belief in what they thought their property was worth and make a timely deal (that may have nonetheless gone against the prevailing wisdom - since this is almost always lagging behind the actual market situation during these turning points).

If a seller made less than they first anticipated in this situation, they still have made an excellent deal. Several months later, those who declined these low offers would typically be thrilled to receive such an offer again. But it's too late.

In a downmarket, regardless of the price sellers are willing to sell for, the few buyers out there are only interested in the most desirable properties (location, location, location). If you have one of those, with an appropriate drop in price, it may get sold reasonably quickly. For those selling less desirable properties (ones that could nonetheless be sold easily, before the market turned) are typically out of luck and often end up sitting on them for months and months longer then they planned.

The Association of Danish Mortgage Banks, last week released figures claiming a 0.8 percent decline in housing prices in the Copenhagen area in the last quarter of 2006. That's not much. However, this doesn't tell the whole story.

Speaking again to my friend who sells real estate in Copenhagen, he noted that at present, sellers in Copenhagen are typically selling their apartments for at least 25% below the
asking price. Given that until very recently sellers could expect to be able to sell their apartment or house for basically the asking price, the significant psychological shift necessary for a seller to accept this new situation is not necessarily an easy one to swallow. Not to mention the amount of money they thought they were going to get, but aren't.

The final mistaken assumption: the market will be turning around again soon, and once it does things will be back to 'normal'.

Wrong again. When the market turns, there is still a huge glut of unsold houses for sale. So it will take quite some time for the market to level out again. It takes a couple years for the average seller to feel any significant change once the market turns because
asking prices will have fallen so dramatically over this time (even if selling prices, though lower now as well, are slowly recovering). The asking price is still typically closer to the amount they imagined they might get when the market turns, but most likely won't. Psychologically it's still a blow to end up with a lot less money than you expected.

The end result is sellers will have to accept a sales price much lower than their original expectations, long after the market has turned around. So in Copenhagen, buyers will remain in a much better position then they have been in the past several years for quite some time to come.

And that is why once a bubble pops, as it has in Copenhagen housing market, it really is gone.

2 Response to "The sound of the popping bubble: A bit about psychology and Copenhagen's housing market"

  1. Siri says:

    I'm in the process of looking for an appartment in Copenhagen and selling one in another country. This article was fantastic! Thanks!
    Who is that real estate agent you speak of?

    Tim says:

    Just drop me an email if you want to know more.

    Tim.

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