No, he's not singing "denser". And whether "dancer" and "denser" sound exactly the same depends on your accent. I'm British, and the two words sound distinctly different because, well, one starts "da-" and the other one starts "de-" :)

I'm just glad the argument has moved on from what it was when the song first came out, to wit, people mishearing what he was singing as "…or are we denser".