Combating rental market financialization in Denmark
Recent reforms to the regulation of rented housing in Denmark offer a useful insight into how private investors can exploit tax provision loopholes to undermine affordability, and the measures that can be enacted to combat these.
Description
Under Danish law, rents charged to tenants are strictly regulated: rent charged may not exceed an amount that covers “necessary operating expenses” and a “return on the value of the property”.[1] The latter is defined as a strict percentage of the property value related to the year in which the property was built. This is known in Denmark as a cost-determined rent (omkostningsbestemt leje). However, until recent reforms were adopted, the legislation also specified two important exemptions to this rent-setting model. Firstly, the rules do not apply to newer buildings (built since 1992) or older buildings which had undergone extensive improvements. The latter was defined in relation to the dwelling’s value and was updated each year.
In reaction to the use of these loopholes by investors, as well as public pressure on policymakers to tackle rapidly rising rental prices, new legislation came into effect in July 2020.[2] Among its provisions was a clause that these exemptions could only be sought five years after a building had changed ownership, were only applicable to buildings with a “C” energy rating or above, and are now in line with the building value, whereas before they could be 10 per cent above it.[3] It is also now illegal for an owner to offer a tenant a financial incentive in return for vacating a dwelling. More severe financial penalties for violating the terms of the rental act have also been adopted.
The Danish experience shows how well-meaning policies, such as those aimed at encouraging greater energy efficiency, can be used in a way that was not intended and worsen affordability and security for tenants. However, it also shows how such loopholes, once identified, can be closed off or adapted to steer the housing outcomes back towards the objective of universal affordable and secure housing.
[1] Martin Bonde-Hansen, “The Dynamics of Rent Gap Formation in Copenhagen: An empirical look into international investments in the rental market”, thesis, Malmö University, 2021. Available at https://www.diva-portal.org/smash/get/diva2:1536203/FULLTEXT02
[2] For information on the changes to the new tenancy law of Denmark, see https://www.boligportal.dk/blog/lejeloven/ny-lejelov-2020/
[3] Ibid.
Scale
National
An initiative of:
