Housing Market Monitor
Group Economics Philip Bokeloh 020 383 26 57
Ongoing recovery: forecasts revised up
29 June 2015 • • •
Stronger-than-expected housing market recovery driven by economic revival and low mortgage rates. Improved bargaining position boosts seller confidence. After five years of decline, asking prices are rising again. 2015 price forecast raised from 1% to 3%. 10% increase in transactions instead of stabilisation at 2014 level.
How fast are home sales rising?
months. That is significantly shorter than in 2013, when the
The number of transactions continues to accelerate. In the first
average was six months, but still twice as long as before 2008.
five months of the year, more than 60,000 properties changed
On balance, the bargaining power is slowly shifting towards the
hands. The transaction volume was thus 8,400 higher than in
sellers.
the same period last year. The number of sold new-build homes is also on the rise. According to the Dutch Builders'
Higher asking price underlines seller confidence
Association (NVB), almost 10,000 new-builds were sold in the first four months of 2015, 3,400 more than in the first four months of 2014. In the decade before the financial crisis, however, the average was significantly higher at 14,000.
% y-o-y
2 1 0 -1
The surge in sales can be seen almost everywhere in the
-2
Netherlands, but is particularly marked in the popular cities.
-3
Another finding is that higher-priced properties are also
-4
returning to favour, with homes over three hundred thousand
-5
euros now accounting for 17% of total sales as opposed to
10
11
only 14% two years ago. The larger share of higher-priced
12
13
14
15
Median asking price
houses stems from the growing number of existing homeowners seeking to move up the property ladder. They
Source: huizenzoeker.nl
tend to look in higher price categories than first-time buyers. The shift in bargaining power is reflected in the selling prices, Moreover, a growing number of over-65s are involved in the
which have been recovering for a while now. The Land
transactions. Their share in home sales has doubled to 6%
Registry price index has been rising since June 2013 and
over the past ten years. This has to do with the ageing
showed a year-on-year increase of 2.6% in May. Based on the
population, plus the fact that the current generation of retirees
Land Registry yardstick, the housing market is now valued
are more likely to have a full pension, substantial savings and
almost 5% higher than at the low point two years ago.
their own home than earlier generations of retirees. Finally, it is
Nevertheless, the price level is still about 18% lower than in
easier for over-65s to move than for young people, as fewer of
August 2008 when prices peaked.
their number are at risk of negative equity when selling their old home.
The improved bargaining position is boosting seller confidence. This is manifested in the asking prices, which are on the up
Are buyers getting more bargaining power?
after five years of decline. The median asking price in May was
Due to the rising transaction volume, the stock of houses for
0.9% higher than in the same month a year ago. However,
sale is shrinking. The home search website huizenzoeker.nl
major differences exist between the various regions, with the
estimates the number of houses on the market in May at
average asking price rising 4.5% in Utrecht and falling 1.3% in
174,000. That is 37,000 less than a year ago. According to the
Drenthe.
Dutch Association of Real Estate Brokers (NVM), home buyers now have a choice of 15 properties on average. That is less
Are the recent results in line with expectations?
than the 30 properties at the height of the crisis, but still more
Sales volumes and price increases beat our expectations in
than before the crisis when the average was 4 homes. Buyers
the first months of the year. At the end of 2014, our estimates
are also required to decide faster. The NVM says that recently
assumed that house sales would stabilise this year and that
sold properties were on the market for an average of four
2
Housing Market Monitor - Ongoing recovery: forecasts revised up - 29 June
prices would rise no more than 1%. The recent housing market
therefore keen to secure their purchase or at least a mortgage
figures suggest that these forecasts were too conservative.
quote before this date. Another factor is that, starting from 1 July, banks are obliged to adhere to the new stricter income
Our caution was prompted by several policy changes which
criteria of the National Institute for Family Finance Information
may have had less impact than we initially assumed. On 1
(Nibud) for mortgages with an interest rate below 3.5%. The
January, for instance, the temporary expansion of the gift tax
banks were granted a period of grace to prepare their internal
exemption ended. As a result, the maximum amount that
organisation for this new measure and were allowed to apply
people are allowed to receive tax-free to buy a house or repay
slightly more relaxed criteria until that date. The imminent
their mortgage has been reduced from one hundred thousand
prospect of tighter income criteria evidently sparked many
euros to just over half that figure. The sales peak in December
house buyers into action.
suggested that this policy adjustment had encouraged many to bring their home buying plans forward. Another policy change
Will mortgage rates fall further?
that gave us cause for caution was the further tightening of the
The ECB is buying up bonds on a large scale in an attempt to
mortgage lending criteria. Since the start of this year, the
push down capital market interest rates and kick-start lending.
mortgage amount that home buyers can borrow has been
The ECB policy initially had little effect. In April the Dutch 10-
lowered, both on the basis of their income and in Loan-to-
year interest rate hit a historic low of 0.3%. In line with the low
Value (LTV) terms.
capital market rates, banks were also able to secure evercheaper funding. Thanks to the low funding costs, mortgage
Financing conditions now slightly less favourable
rates sank to historically low levels.
Swap rate for terms of 1 to 30 years on given date
In the meantime, capital rates have edged higher again to just
2.0
over 1%. Evidently, investors have started to realise that 1.5
effective yields on bonds were too low and that the risk of a price loss in the event of rising interest rates is too great.
1.0
Bonds with residual maturities up to six years even fetched a negative effective yield. The current rates should be regarded
0.5
as somewhat more 'normal' than the low rates of mid-April. 0.0 1
2
3
4
5
01 January 2015
6
7
8
9 10 12 15 20 25 30
01 May 2015
26 June 2015
Against this background, a further decline in mortgage rates is less probable. In fact, a rise in mortgage rates cannot be ruled out. From 2020 banks will be obliged to maintain higher capital
Source: Datastream
buffers for mortgage loans. The increased buffers are designed to guarantee the stability of the financial system, but
At the same time, we slightly underestimated the influence of
this additional safeguard will come at the price of higher
the European Central Bank (ECB) and the pace of economic
financing costs for banks. If banks pass these extra costs on to
growth. The economy is doing better than expected, and we
their customers, mortgage rates will rise.
are now counting on GDP growth of above 2% for 2015 and 2016. Besides the boost from low oil prices, the economy is
However, their latitude for doing this in the form of higher
also benefiting from the ECB interventions. These
mortgage rates is limited. Competition in the mortgage market
interventions are tempering the euro exchange rate and
is growing. More and more foreign parties are venturing into
pushing down capital market interest rates. As a result,
the Dutch mortgage market. Entrants perceive the credit risks
mortgage interest rates have fallen to historically low levels
as low. They see that the government has implemented far-
and net interest charges have rarely been so modest relative
reaching reforms, house prices are finally starting to rise again,
to net income. Improved affordability has greatly bolstered
and the losses on mortgages have remained limited despite
confidence in the housing market.
the sharp house price slump in the past years. Examples of recent market entrants are Canada-based Mapple, UK-based
Finally, certain factors gave house sales a temporary extra impulse and served to inflate the housing market results in the first half of the year. First of all, the threshold for the National Mortgage Guarantee (NHG) will be reduced on 1 July from EUR 265,000 to EUR 245,000. Many home buyers are
Venn and US-based Goldman Sachs.
3
Housing Market Monitor - Ongoing recovery: forecasts revised up - 29 June
Will the National Mortgage Institution ever get off the
the penalty interest. The group eligible for remortgaging is also
ground?
expanding. Due to the renewed increase in valuation levels,
The Netherlands has been toying with the idea of a National
fewer homeowners have 'under water' mortgages, and it is
Mortgage Institution (NHI) for a while now. The aim is to
obviously easier to switch if there is no risk of negative equity.
bundle NHG mortgages of banks in this institution and to sell these, complete with government guarantee, to investors. The
More remortgagers because of low mortgage rates
underlying reason is that the current funding costs of banks are higher than necessary. The government's role as backstop for
Thousands
%
40
24
30
22
20
20
10
18
NHG mortgages is not always clear to international investors. Bundling of the mortgages within a National Mortgage Institution can remedy this problem and make NHG mortgages easier to trade. According to the 'Alternative Housing Market Financing Arrangements' Committee, the National Mortgage Institution can reduce the margin between the NHG mortgage interest rate and the capital market rate by 20 basis points. The
0
16 14
15 Number of mortgages (lhs)
Remortgages market share (rhs)
advantage for consumers could be even greater if new entrants also make use of the new source of funding.
Source: Land Registry
According to the committee, the extra competition could lower the margin by a further 30 basis points.
In line with the growth in mortgage business, the number of guarantees issued by the Dutch Homeownership Guarantee
However, the creation of a National Mortgage Institution runs
Fund (WEW) is also rising. In the first quarter, 27,100
up against practical obstacles. Brussels is refusing to agree to
households financed their home purchase under the National
the initiative because of suspicions of unlawful state aid. The
Mortgage Guarantee (NHG) against 23,300 households in the
Hague has sought to allay Brussels' fears, but so far in vain.
first quarter of last year. Nevertheless, the NHG share is
Statistics constitute another sticking point. If Eurostat classifies
falling. Of the total number of transactions, 65% were NHG-
the National Mortgage Institution as a government sector
guaranteed compared to 69% last year. The decrease is
institution, the Dutch government is obliged to add the NHI
attributable to the step-by-step lowering of the NHG threshold,
bonds to the public debt. And that is something it is unwilling to
which means that the number of transactions eligible for the
do. In our view, the longer the talks between The Hague and
NHG is steadily diminishing. Even so, there are currently 1.2
Brussels drag on, the less chance there is of the proposed
million outstanding guarantees issued under WEW with a total
institution ever getting off the ground. The improved situation in
value of EUR 179bn.
the housing and mortgage markets and the growing competition may also make such an institution less necessary.
What about the mortgage risks? Newly concluded mortgages carry a lower financial risk. Due to
Is mortgage business continuing to grow?
the tax adjustments, the share of annuity-based mortgages
The volume of mortgage business is growing. In the first five
has increased, which means that more mortgagors are making
months of the year, 88,000 mortgages were concluded, 11,000
repayments. There is also a growing preference for long fixed-
more than in the same period last year. The average mortgage
term mortgages, so that mortgagors are less exposed to
sum amounted to EUR 250,000, which is EUR 4,000 higher
interest rate fluctuations. In addition, due to the adoption of
than in the first five months of 2014. Total mortgage business
more stringent Nibud mortgage criteria at the start of this year,
for the first five months amounted to EUR 16bn, over EUR 4bn
home buyers can borrow substantially less on the basis of their
more than last year.
income. Finally, buyers can also borrow less in proportion to the value of their home. Mortgages with an LTV above 100%
The most important reason for the growth in mortgage
are now rare.
business is that more transactions are taking place and at a higher price on average. In addition, the remortgage market is
The risk of negative equity within the outstanding mortgage
also starting to pick up after undergoing sharp contraction.
portfolio is decreasing. Due to the higher valuation levels of the
More homeowners are looking to switch their mortgage. At the
housing market, fewer homeowners have 'under water'
current low mortgage rates, this can be advantageous despite
mortgages. This trend is no longer reinforced by the amount of
4
Housing Market Monitor - Ongoing recovery: forecasts revised up - 29 June
repayments exceeding the amount of new mortgages. The
The committee sees various advantages in a lower LTV ratio:
outstanding mortgage volume has fallen marginally from EUR
first-time buyers would be less vulnerable to falling house
652bn in the first quarter of 2014 to EUR 651bn in the first
prices; there would be fewer strong fluctuations in house
quarter of 2015.
prices, resulting in a more even wealth distribution between different generations of home buyers and also fewer violent
Despite the receding risk of negative equity, the WEW
economic swings; foreign investors would be more interested
received more loss claims in the first quarter. The amount
in Dutch mortgages, which would help to reduce the costs of
involved in the claims was also higher. The WEW reports that
bank funding; and, finally, foreign lenders would be
unemployment is now more often the cause of loss-making
encouraged to enter the mortgage market, leading to more
forced sales. The disadvantageous effects of long-term
intense competition.
unemployment are also continuing to feed through in the mortgage default figures with a time lag. According to the
We are not entirely convinced by these arguments. First of all,
Credit Registration Office, there were 113,000 households with
first-time buyers are already much less vulnerable to falling
payment arrears of 120 days or more in April, up 4,000
prices due to the compulsory annuity repayments. Moreover,
compared to six months ago.
international research shows that income criteria are much more effective in keeping house price fluctuations in check, as
Encouragingly, the increase in the number of defaulters is
a stable LTV ratio means that the level of lending continues to
slowing. The inflow of new households with payment arrears is
increase in step with rising prices. The Netherlands is thus
decelerating, while the number of households overcoming their
leading the way with its stringent Nibud rules. Moreover,
payment problems is growing. We expect this trend to
foreign investors are less wary of the Dutch market than the
continue. With the jobs market improving and disposable
committee suggests. The spreads on bundles of packaged
incomes rising, we foresee that the number of households with
Dutch mortgages are extremely low. Finally, the arrival of
payment arrears will soon stabilise and then start to decline.
foreign lenders proves that they are by no means put off by the current LTV ratio.
Slowing increase in number of payment arrears Thousands
% y-o-y
On top of this, there are more fundamental objections against a further reduction of the LTV ratio. First-time buyers must
120
30
100
25
80
20
60
15
the average first-time buyer will need two years longer to save
40
10
the required amount. Researchers of the Amsterdam School of
20
5
Real Estate are less optimistic and say that it could take some
0
0
potential buyers significantly longer. Either way, if first-time
07
08
09
10
11
12
Households in arrears (lhs)
13
14
15
Change (rhs)
save up sufficient capital to make a down payment on their home. But this will be hard to do if they are also obliged to set aside money for their pension. According to DNB calculations,
buyers stay longer in rented accommodation, the demand for rented housing will rise. This is a problem, as rented housing is in very short supply. The mid-range segment of the rental
Source: BKR Credit Registration Agency
market remains underdeveloped.
Are more mortgage restrictions likely?
In this light, it is hardly surprising that the committee's
The Financial Stability Committee, comprising representatives
recommendations have found little support in The Hague. The
of the Dutch Central Bank (DNB), the Authority for the
majority of the House of Representatives has rejected them
Financial Markets (AFM) and the Ministry of Finance, insist
out of hand. The responsible minister, Stef Blok, has also
that more mortgage borrowing restrictions are necessary. In a
chosen to disregard them as he is unwilling to disturb the new-
recently published report it recommends a further reduction of
found calm in the housing market. Whether this means that the
the maximum loan amount. Under the government's current
proposal has been definitely shelved remains to be seen.
plans, the maximum mortgage will be lowered to 100% of the
International partners -such as the European Commission, the
collateral value in 2018. If the committee has its way, the
OECD and the IMF- regularly reiterate that the housing market
annual reduction will be continued after 2018 until the Loan to
reforms do not go far enough and are being implemented too
Value ratio is 90%.
slowly. They will probably stick to their recommendations, but the priorities of the Dutch government clearly lie elsewhere.
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Housing Market Monitor - Ongoing recovery: forecasts revised up - 29 June
What are the government's priorities?
properties eligible for liberalisation, the number of transfers can
Since the Second World War, the private rented segment has
grow in the future.
steadily shrunk. Shortly after the war, rented housing still accounted for 60% of the housing stock. The current
What are the forecasts for the housing market?
percentage is less than 10%. As a result, the housing market
The recovery in the housing market this year has so far
basically offers two options: owner-occupied or rented. There
exceeded our expectations. Both the number of transactions
is no mid-range segment in the rental market. This is a serious
and the prices have risen faster than thought. One important
gap, because it is precisely this mid-range segment that drives
reason for the robust housing market recovery is the low
housing and job mobility. The private sector can play an
mortgage rates. Another is that the economy is doing even
important role in developing the mid-range segment.
better than anticipated. The strengthening jobs market and the faster growth of disposable incomes are having a favourable
Share of private rented segment
knock-on effect on the housing market. Confidence is running high. Potential buyers who initially postponed their home purchase are now eager to make a move.
100% 80%
On top of this, the effects of the lower gift tax exemption have
60%
proved to be less detrimental than feared. The widespread media attention last year has given the scheme a higher
40%
profile. Though we have no information about the number of
20%
gifts this year, our impression is that the gift tax scheme now enjoys a higher take-up than in the past, even though the
0% 1947 1956 1967 1975 1985 1993 2005 2010 Home owners
Private rent
Social rent
temporary increase in the maximum exempt amount has ended. In addition, the dampening effect of the tighter income criteria also seems to be less strong than expected. However,
Source: Platform 31
it is still too early for a definite conclusion, as banks will not start applying the new Nibud criteria in full until 1 July.
The government has implemented a series of measures to stimulate private rental. The liberalisation threshold, for
The above justifies an adjustment of our forecasts. We are
instance, has been frozen, a more market-based housing
raising both the estimate of the number of transactions and
valuation system has been introduced and the role of housing
that of the price development. The transaction volume will rise
associations has been more clearly defined. The result is a
by 10% rather than stabilise this year. House prices will
more transparent market, which will encourage more
appreciate 3%, as opposed to our previous estimated increase
investment. Investors are also becoming more interested in the
of 1%. The revised forecasts for 2015 also compel a revision of
rental market because the returns on rented housing are
the 2016 forecasts. Previously, we estimated a sales increase
attractive now that house prices have fallen, while rents have
of 10% for 2016. However, as a large part of this growth will
risen.
already take place this year, we are now counting on a rise of only 5% in 2016. Our estimate for the price development in
This revived investor interest opens up various opportunities to
2016 has been raised from 2% to 3%.
expand the mid-range segment of the rented sector. 1) Newbuild. If investors and developers work better together and
Price and transaction estimates
municipalities set land prices at attractive levels, the development costs and risks of new-build projects can be kept within reasonable bounds. 2) Transformation of property. An additional advantage of converting vacant retail and office space into residential space is that the existing built environment is put to better use. 3) Sale of housing association properties. Since the rules were relaxed in 2013, various large portfolios have been sold. With 800,000 housing association
Transactions (% y-o-y)
Prices (% y-o-y)
2014
39.4
0.9
2015
10 (0)
3 (1)
2016
5 (10)
3 (2)
Source: Group Economics
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Housing Market Monitor - Ongoing recovery: forecasts revised up - 29 June
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