Could Danish co-op model solve Ireland’s housing problems?

Recent data from Eurofound showing that Ireland has one of the EU's highest rates of people aged 25-29 still living in the parental home while Denmark has the least, provides a shocking illustration of sharply different standards of living in two otherwise broadly similar countries.

Ireland and Denmark are much alike in terms of population size, land mass, education levels and both boast of their open economies and international outlook. But why then do 47.2 per cent of young Irish adults live at home with their parents while only 4.3 per cent of their Danish counterparts have yet to fly the nest? Is it that the Irish love their mammies more than the Danes do? Or perhaps it’s because they are slower to mature and haven’t yet learned to cook? Not so. All of these are glib (and frankly insulting) explanations because the underlying cause of Ireland’s housing crisis as it affects this cohort is largely a matter of simple economics: availability and affordability.

On top of this, the Danes are helped by a solid framework of legislation that regulates rent levels and permitted increases, while they also enjoy a degree of security of tenure that is unheard of in Ireland. Buyers, meanwhile, are assisted onto the property ladder by a benign interest rate environment, a competitive and transparent mortgage market and banks that are more than willing to finance young people whom they deem to have good prospects.

Problems

Denmark isn't without its housing problems, and new arrivals, be they students from the provinces or international executives, can find Copenhagen (and other university cities) tough going. But overall, local knowledge, a good level of preparation and some flexibility can give 20-something Danes a lifestyle that only a very lucky few Irish counterparts can aspire to.

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This is best illustrated by way of a concrete example. Christian*, a 25-year-old Copenhagen medical student, and his newly qualified doctor girlfriend, will move in March into their first house, a neat three-bedroom, two-bathroom bungalow in turn-key condition, a 25-minute train ride from the city centre. (*Full disclosure, Christian is this writer’s son.) While it’s not in the leafy suburbs north of the city, where Denmark’s most richest reside, it’s still an attractive and settled community, consisting of well-tended 1970s houses, large public parks, and an abundance of kindergartens, schools and sporting facilities. The bungalow, all of 111sq m (1,200sq ft), cost the equivalent of €455,000, and, with a 30-year fixed rate 1 per cent mortgage is well within their limits even though Christian hasn’t yet graduated.

Their bank, a specialty financial institution for medical students, medics and their families, was eager to lend – the entire deal, from viewing, to mortgage approval to offer accepted, took under a fortnight. Indeed, such is their optimism and the bank’s level of confidence in their future, that the fact they will have their first child within weeks of moving in was seen only as a joyful addition rather than a barrier to mortgage approval.

Note, that this young couple’s mortgage rate is just 1 per cent, less than half the current lowest Irish mortgage rate. Some customers score even lower rates, 0.5 per cent or below, even though Denmark is not a member of the euro zone and its base deposit rate, at precisely zero per cent is therefore higher than the ECB’s current negative 0.5 per cent rate. In theory at least, Ireland’s mortgage interest rates should not exceed those of non-euro zone countries. But they don’t.

A student’s lot

So how is all of this possible? Two particularly fortuitous structural features of the Danish housing and education market went a long way in securing a smooth transition for this young pair from life at home to life on their own.

The first of these is that Danish third-level students are actually paid to attend college. All students, regardless of parental income, qualify for state education grants and there’s no such thing as university fees. However, the size of the grant varies depending on whether the student lives at home with their parents or moves out to student accommodation or other type of rental. In our family’s case, our kids qualified for monthly payments of €835 each when they left home after graduating from high school. Had they stayed with us, their grant would have been reduced to €129, so the system, in effect, encourages independence from an early age.

Students are also allowed to work part-time (subject to a certain ceiling) in order to supplement their grants, meaning that a relatively comfortable existence can be had. A system involving special labour market rules for student works also makes life easier as it funnels students into part-time jobs that are directly related to their area of study and provides them with beneficial work experience as well as welcome cash.

Some students, of course, still work as baristas or in other forms of casual labour, but most medical students can secure jobs (with increasing levels of responsibility as their studies progress) in the public health system. Law students find roles in legal firms, the state or in financial services, while marketing students gravitate towards advertising agencies and the like. It’s worth stressing, that these are real jobs, and they are treated as valuable co-workers, not underlings whose only function is to operate photocopiers.

Rent or buy?

Although renting a home in Ireland is often seen as a temporary stopgap before home ownership (albeit, increasing less so as the housing crisis grinds on), there is no such stigma in Denmark. Here, the housing market is split almost evenly between owner-occupiers and renters, with the renters actually having a slight upper hand. The vast bulk of the rented accommodation is owned by housing associations – highly regulated institutions often controlled by domestic pension funds which have a long-term interest both in ensuring market stability and in preserving the value of their assets. Waiting lists, particularly for apartments or houses in attractive areas, can be long, but affordable rented accommodation is not impossible to find.

One particularly Danish feature of the housing market – the andelsbolig or co-operative – is particularly useful for young people who want to get on the housing ladder. According to Danish law, a property owner wanting to sell off a block of six flats or more is required to give existing tenants a first option to buy, and the price asked must not exceed the state-controlled putative value. Should the tenants accept, they hand over their money and form a co-operative whose statutes, again, are strictly controlled.

Andelsboliger are essentially a half-way house between renting and owning in that you buy a share in the co-op entitling you to live in one of the apartments in the development. When you decide to leave, you either sell on to somebody on the co-op’s waiting list, or to a friend in the unlikely event that no “insider” is waiting for your flat. However, unlike the free market where any price increases go straight to you pocket, co-op dwellers cannot set their own asking price. Instead, the price is set as a percentage of the value of the entire development and takes account of any outstanding debts the building may have. But if you’ve undertaken substantial improvements, say a new kitchen or bathroom, you’re likely to be compensated for the outlay.

This Danish co-op system is a cornerstone of affordable housing and has been in operation for over half a century. It is also a well-established route into home ownership for the younger generation: a one-bedroom flat in Copenhagen can be had for as little as €70,000, if you’re extremely lucky and have been on the waiting list for a long time.

For years, prospective co-op dwellers carped that they couldn’t qualify for mortgages to buy co-op flats and were reliant on more expensive ordinary bank loans instead. In the face of lower and lower mortgage interest rates, the government stepped in to allow co-op tenants access mortgages, but what was supposed to be a helping hand produced some unintended consequences that has threatened the viability of the co-op system itself.

As interest rates plunged and cheap money abounded, many of the country’s 10,000 housing co-ops jumped at the chance to borrow big and replace roofs, or add balconies or triple glazing, or do all three. In the process, an estimated one-third of all of these developments ended up seriously overstretched.

Enter the ‘vultures’

Meanwhile, international investors began to develop an interest in the Danish rental sector, in particular how they could sidestep the tight rent controls by buying a block of flats, pumping money into “substantial” improvements (bathrooms, kitchens, roofs, etc) and then jacking up rents.

One such fund, the Blackstone Group, sent alarm bells ringing and had the centre-left government hollering "vultures" by embarking on a spate of purchases. By some accounts, it has bought some 2,300 Danish rental properties in the past few years. Though Blackstone said it operated strictly within the law, the government was unnerved and moved to put together a new law to ward off the threat. The government, a minority, initially sought approval to ban developers from post-renovation rent hikes until they had owned a property for 10 years, but this alarmed the domestic pension funds which argued that it would prevent them from renovating properties and safeguarding their assets.

In the end, after weeks of difficult inter-party negotiations, the government and its supporters agreed in January to cut the moratorium to seven years of ownership, but this has thrown up another difficulty for the co-ops. Although the government has made some efforts to reduce the exposure of the andelsboliger, many are simply already so overextended that price declines in the rental market could hurt them badly.

Reports are already emerging of banks cautioning prospective co-op apartment buyers of possible valuation reductions and of buyers subsequently backing off purchase deals. So, although Denmark’s new anti-speculation law will likely stop the vultures in their tracks, it could also cripple one of the most cherished and innovative features of the country’s housing market. Which, of course, would be a great shame for all those thousands of young people, who, like my son, used it as a springboard to their own home in the suburbs.