Housing market recovery continues
Dutch Housing Market Quarterly
After a drop in economic activity in the first quarter due to incidental effects, the Dutch economy will recover further over the course of this year. Besides favourable prospects for the export sector, the domestic front is also showing signs of vitality. Nonetheless, households will remain cautious this year about increasing their consumption. Thanks to a rise in real disposable household income, we expect to see a slight increase in private consumption next year. The anticipated acceleration of economic growth, from ½% this year to 1½% in 2015, will result in a slight drop in unemployment next year.
Strong rise in home sales, slight price rise
The recovery on the residential property market continues. The Dutch housing market bottomed in mid-2013, in terms of both price and sales numbers. Since then, sales have forged ahead and house prices have risen slightly.
The existing homes price index (PKB) rose further during the second quarter of 2014 - by 0.7% compared to the first quarter of the year. This is a rise of 1.3% vis à vis the second quarter of last year. Sales of existing homes also rose - up 10% on the previous quarter (seasonally adjusted). This increase was somewhat stronger than we had anticipated.
House buyers are currently finding conditions more favourable to become active on the housing market than in recent years. Many who had postponed their relocation plans are now emerging from the woodwork. Falling mortgage rates and improved confidence are contributing to the improved sentiment. These positive factors likely have a stronger effect than the problem of negative equity, which has a dampening effect on sales. For 2014 as a whole we therefore expect to see the number of transactions rise to between 135,000 and 145,000 - a marked improvement on the total of 110,094 achieved in 2013. Moreover, we expect an average price rise of ½ to 1½% vis à vis 2013.
In 2015 the economy will pick up further, and we also envisage further improvement in the dynamic on the housing market. Because neither house prices nor mortgage rates are expected to rise rapidly, affordability will remain good. At the same time, real disposable household income will rise further - as will employment. And in view of the modest house price rise since mid-2013, confidence in the housing market will likely continue to grow. This should lead to a rise in the number of homes sold in 2015 to between 140,000 and 160,000. Besides, the average house price in 2015 is expected to go up between 1 and 3% compared to 2014.
Mortgage rates historically low
Total mortgage debt declined in 2013 and will rise little if at all in 2014, despite an increase in new mortgages issued. Mortgage rates have fallen sharply since mid-2011. Fixed interest rates of up to ten years are at a historic low and we don't envisage a sharp rise this year. Falling mortgage rates are welcome not only for first-time buyers and subsequent buyers, but also for home owners whose fixed interest period is soon to elapse. This development will support a rise in house sales and a modest price rise in 2014 and 2015.
Pieter van Dalen illustrates the Dutch Housing Market Quarterly.
Chapter 1: Economy boosted by tailwinds
Around the turn of the year economic activity showed a strong dynamic. Real Gross Domestic Product (BBP) declined by 0.6% in the first quarter, but this followed growth of 0.5% in the last quarter of 2013. The first quarter decline was largely the result of incidental fluctuations in car sales and gas production. For 2014 as a whole, we expect to see a rise of ½% in real GDP compared to last year (Table 1), mainly thanks to exports and investment. In 2015 household consumer spending will also make a positive contribution to GDP, with expected growth of 1½%.
Exports profit from economic recovery among trading partners
Export growth was on the weak side last year, at only +1.4% year-on-year. In the first quarter of this year, exports grew 1.2% quarter-on-quarter. Monthly data through May this year indicate a contraction of exports in the second quarter. Our expectation is that exports will pick up again during the course of this year, driven by further economic growth in the Eurozone and higher growth in important trading partners such as the U.K. and the US. The sector will be boosted by a slight depreciation of the euro vis à vis the US dollar and the pound sterling. For the year as a whole, we envisage an acceleration of growth to 3½% compared to last year and 5% in 2015.
More green lights on the home front
In July, consumer confidence registered -2 for the second successive month, well above the long-term average of -7.3 (Figure 1). The confidence index has risen sharply since mid-2013, mainly thanks to improved sentiment about the general economic climate. The sub-indicator 'good time for large purchases', also rose in recent months. This indicator, which is important for the housing market, reached -9 in July, compared to -17 in January. Although consumers are largely still cautious about making large purchases, their reluctance to spend has diminished considerably.
This year, purchasing power has improved for the first time in four years. Because inflation has eased considerably, we will see an end to the real decline in income. Purchasing power is also being boosted by a number of tax relief measures that the government has implemented. These include a reduction of the lowest income tax rate and an increase in the general tax credit. Workers are also able to benefit from the increase in the general tax credit for workers and lower pension premiums as a result of the reduced pace at which pension rights are built up.
There are also early signs of a recovery on the labour market. In June, unemployment fell for the second successive month - to 6.8% (Eurostat/ILO definition), compared to 7% in May and 7.2% in April. A rise in the number of vacancies and temporary hours worked via employment agencies indicate an increase in employment in the private sector (see Badir, 2014). By contrast, jobs are yet to disappear in the public sector as a result of government cut-backs. On the whole, labour market developments of recent months suggest that unemployment may rise less than we had expected this year.
Recovery in consumption of durable goods
After years of decline, household disposable income is edging upwards in 2014. Despite this development, we expect to see a contraction in private consumption for the year as a whole compared to 2013. The likely domestic recovery described above, however, suggests that during the course of the year, consumption may pick up sooner than we had anticipated.
The y-o-y rise in the consumption of durable goods since November 2013 likewise indicates the possibility of a recovery in household consumption (Figure 2). Late last year, growth in spending on consumer goods was mainly driven by temporary higher car sales; in the early months of this year it was due mainly to other categories of durable goods, such as textiles and household goods and appliances. Although consumers are still being cautious in their spending on home furnishings, this element of durable consumption might well rise this year, boosted by the rise in home sales (Giesbergen, 2014).
Chapter 2: Existing homes market
A total of 63,037 homes changed hands in the first half of 2014. This was the largest number sold in a six-month period since the start of the crisis in 2008. The existing homes price index (PBK) of the Land Registry/CBS rose by 0.7% in the second quarter of the year, compared to the previous quarter (Figure 3), and by 1.3% in compared to the second quarter of 2013. Based on the prevailing improvement in confidence, the falling mortgage rates, increased activity on the housing market, recovery in construction and the modest rise in real household disposable income, we expect to see a strong rise in house sales in 2014 and 2015. That said, prices will rise only marginally in the short term, in view of the current negative equity problems and credit restrictive measures such as tightened Nibud standards, the return of annuity mortgages as standard and the lower maximum mortgage.
Recovery in sales continues
In the second quarter of 2014, 34,074 homes changed hands. The increase of 10% compared to the first quarter (seasonally adjusted, Figure 4) is somewhat stronger than we had expected. The recovery in sales thus continues. The hefty year-on-year rise (+54%) does not accurately reflect recent developments, because a relatively large number of households purchased a home in the last quarter of 2012 in order to benefit from the final opportunity to avail of fiscally favourable mortgages. In a rebound effect, sales numbers were relatively low in the first two quarters of 2013. Nor is a comparison with the second quarter of 2012 helpful, because households were acting in anticipation of a hike in transfer tax to be introduced on 1 July 2012, inducing many house buyers to bring their purchase forward. A comparison with the second quarter of 2010 (+6.8%) and 2011 (+15.4%) shows, as does the short-term development, that the recovery is gaining momentum.
The Dutch Association of Real Estate Brokers (NVM) reported an increase in the number of sales contracts mediated by its members in the second quarter. The number of NVM sales contracts reflects current market developments for some 75% of the market (on average two months earlier than the Land Registry). At a total of 29,216 sales agreed, this was the best quarter since 2008. Seasonally corrected, this amounts to an increase of 6.9% compared to the previous quarter, showing that the rising trend continues (Figure 5). This increase anticipates a further rise in the number of sales registered with the Land Registry in the third quarter of 2014.
New supply boosted by increased confidence
Thanks to the rise in sales, a change has occurred in the profile of unsold housing stock. There has been a relative decline (ceteris paribus) in the supply of second-hand houses for sale. At the same time, the recovery on the housing market may be an incentive to some vendors to put their house up for sale. During this quarter, supply remained more or less unchanged. Actual supply rose slightly but after seasonal correction, a slight drop was registered (Figure 6). In the second quarter, as a rule, supply is somewhat greater than in the earlier months of the year. But stabilising supply - while sales are rising - shows that new supply is being released onto the market, thanks to improved confidence.
Slowly but surely, the market is shifting from being very much a buyers' market to a slightly better market for vendors. The NVM shortage indicator, which divides total available supply by the number of transactions, declined further this year, to 16. This is substantially lower than the level of 29.5 recorded in early 2013 (Figure 7). A rise in the number of sales will push this indicator down over time. Meanwhile it is still very much a buyers' market. Prior to the crisis, the indicator stood at an average of between 6 and 7 (NVM, 2014).
Demand and supply coming closer together
The average selling time declined during the past quarter to 135 days, a significant improvement on the 160 days registered in the previous quarter (Figure 8). However, two contrasting scenarios can be observed. Houses new to the market - generally keenly priced - sold relatively quickly in the past quarter; by contrast, houses that had been on the market for some time took longer to sell. The same picture can be seen in the case of another yardstick - the length of time houses remained on the market. This declined for the first time in three years: from 439 days to 402 days. Figure 9 shows that a relatively large number of homes have come on the market that are sold within a quarter; however, at the same time, the percentage of homes on the market for longer than three years has risen to 17% of total supply. The asking price for these houses is likely too high. There are various reasons why vendors stick to these high asking prices. The main reason is likely to be unwillingness to accept a loss on the sale (Van Dijkhuizen, 2013). These include households who are capable of financing residual debt in their new mortgage and/or have sufficient savings in order to be able to afford to move house. However, there are also home owners who are not in such a position. People in this group are obliged to stick to a high asking price.
Reasons for increased sales
In our previous Housing Market Quarterly we explained how the improved affordability, lower mortgage rates, growing confidence and rising rents constitute the underlying factors for recovery on the property market. A survey of NVM members provides a breakdown of these factors in terms of their importance for the recovery of the housing market (Figure 10). Growing consumer confidence (32%) and falling mortgage rates (28%) are the main factors behind the recovery, according to the estate agents surveyed. The low house prices and low mortgage rates facilitate the financing of a house purchase, also helped by tax-free gifts from families (Hofs, 2014).
The speed at which sales increase depends on a number of factors, particularly the degree to which delayed house-seeking activity is now being released onto the market. This pent-up demand has built up during the crisis years (Ministerie van BKZ, 2013), when potential buyers put off buying a house on account of falling prices, uncertainty about their financial situation and cautiousness caused by the ongoing discussion about housing market reforms. Research by Boumeester (2013) shows that potential demand for homes in the purchase sector (both new and existing) did not fall off as such during the crisis (The P-bars in Figure 11). However, because this demand did not frequently translate into activity in recent years (the R-bars in Figure 11), a veritable sea of demand has arisen.
The rising number of house sales since mid-2013 give the impression that households who had put off their plans to move house now have sufficient confidence to enter the property market. Confidence in the market – measured by the Home-owner’s market indicator of the Homeowners’ Association – has risen for 18 successive months since January 2013, reaching 93 in June this year. This is the highest point registered since 2006 and is well above the long-term average of 78 (Figure 12). Consumer confidence has now been restored, but meanwhile there are other factors that continue to keep the brakes on rising house sales.
Factors preventing a rapid rise in sales
One factor holding back sales is the sizeable number of home owners whose mortgage debt is greater than the value of their home. Of 850,000 potential house buyers, there are 260,000 with a potential negative equity. Mortgage holders are permitted to include any residual debt in the financing of their next home, but there are restrictions to this provision. Under normal circumstances, a mortgage may not exceed 104% of the value of the property. In the case of negative equity, banks are permitted a certain amount of flexibility, which means a higher percentage is possible. However, this depends on whether the monthly costs (including financing of the residual debt) are not disproportionate to the income.
In our Special Report Herstelvermogen van huishoudens die onder water staan we showed that it is mainly relatively young home owners, who bought their house during the past decade or so, who are saddled with potential negative equity. Just as they are ready to take the next step on the property ladder, they are being held back by negative equity. On a more positive note, however, the problem of negative equity will gradually diminish (Figure 13). If prices rise in 2014 by 1% and next year by 2%, then this year there will be 19,000 and next year 30,000 potential house-seekers who will rise above water. Research by the Netherlands Environmental Assessment Agency (PLB) has found that ultimately 33% of those with relocation plans actually do move house within two years. This would mean that in 2014 over 6,000 and in 2015 nearly 10,000 homes will be sold by owners who were still in negative equity at the start of this year.
Conclusions and sales expectations
We believe that on balance, the positive factors will have a stronger effect on the recovery in sales than the factors associated with negative equity. This is because the pent-up demand among those without or with only slight negative equity will be released onto the market, fuelled by high confidence and declining mortgage rates. Therefore, for the remainder of the year, we expect to see a further rise in home sales, reaching between 135,000 and 145,000. This is a major improvement on the total of 110,094 sales achieved in 2013. Accordingly, for sales results, 2014 is set to be the best year since 2008.
Household income will rise further in 2015 (see Chapter 1). For next year we also envisage a modest rise in employment. Moreover, in view of the gradual price rise of recent quarters, confidence in the housing market is expected to grow further. Meanwhile, in recent months, the number of newly constructed houses sold has risen. NEPROM (Association of Dutch project developers) expects the total number of new completions sold this year to reach over 20,000; this is an increase of 6,500 compared to 2013. We expect these sales to account for at least 5,000 houses sold from the existing housing stock. Finally, the rising price trend will alleviate the negative equity problem somewhat in 2015, enabling greater mobility on the property ladder. Altogether, we expect a further increase in home sales in 2015 of between 140,000 and 160,000.
Prices recovering slowly but surely
The prices of all house types rose by 0.7% q-o-q in the second quarter of 2014. Mid-terrace homes rose by only 0.3%, while apartments showed the strongest rise (+0.9%). Thus the recovery in house prices is continuing slowly but steadily. A year-on-year comparison with the same quarter in 2013 shows a similar picture (+1.3%). During the past six months, prices have been inching upwards again (+1.2%, Figure 14). The nominal price level is now equal to that of 2003, and in real terms, the price index is back to the level of 1999 (Figure 15).
This stabilising trend is supported by sales numbers. Declining mortgage rates are also making a contribution (see Chapter 3). Against this, credit restrictive measures, such as the tightened Nibud mortgage-lending standards, the return of the annuity mortgage as standard and the lowered mortgage ceiling have dampened any major price rise.
House price expectations
Prices bottomed last year (June 2013) and are now gradually on the rise. Because of the large supply on the market and the long selling times (see Figures 7 and 8), growth will remain limited in the coming period. We expect that the average price index in 2014 will show a rise of between ½ and 1½% compared to 2013.
For 2015 we envisage further growth in the economy, employment and real household disposable income. Moreover, we do not expect any major rise in mortgage interest rates. These factors, combined with rising sales, will drive prices higher during the course of the year. Accordingly we expect house prices to go up by 1% to 3% next year.
Pieter van Dalen
Chapter 3: Mortgage Trends
Total outstanding mortgage debt dropped in 2013 and will rise little if at all in 2014, despite an increase in newly issued loans. Mortgage interest rates have fallen sharply since mid-2011. Rates for mortgages with a fixed rate period of up to ten years are at a historic low and we do not expect to see them rise sharply this year. Declining rates are good news not only for first-time buyers and subsequent buyers on the housing market, but also for home owners whose fixed rate period is soon to expire.
3.1 Rise in newly issued mortgages
With house sales picking up, mortgage issuance is also growing apace. In the second quarter of 2014 new mortgages to the value of € 8 billion were issued. This is more than in the second quarter of 2013 (€ 5.1 bn), but less than in the second quarter of the years 2009-2012 - a remarkable statistic, in the light of the rise in home sales. At 34,074 transactions, home sales were over 11% higher than in the second quarter of the years 2009, 2010 and 2011 (around 30,500 transactions) and comparable to the second quarter of 2012 (34,628). The reason why the value of the new mortgages lags behind transaction numbers is because the average selling price has declined (by over 9% since the period 2009-2011), and moreover, buyers have to pay a greater percentage of the purchase costs with own funds - or family money (Hofs, 2014).
With total new mortgage issuance reaching € 18 billion in the first half of 2014, a rise of total mortgage debt by € 4 to 9 bn might be expected, on the basis of historical developments. Instead, total mortgage debt has declined since late 2012, when it amounted to € 653 bn; by the end of the first quarter of 2014 the total had fallen to € 630 bn (Figure 2), a decline of 23 billion (3.5%).
For the second quarter of 2014 there are as yet no Dutch central bank (DNB) figures available for total mortgage debt; however data exists on the volume of mortgages issued by banks. Based on this information, it appears mortgage debt in the second quarter is stabilising, despite the rise in newly issued loans. The data concerns gross amounts, which do not take account of savings or insurance products linked to mortgages. In early 2012 estimates by DNB put this accumulated capital at 30–45 billion euro, or 5 to 7% of outstanding mortgage debt (DNB, 2012). Since then, this amount will have grown further, which means net mortgage debt has fallen more than the drop in gross mortgage debt.
The decline in mortgage debt is due to the ongoing trend of increased repayments. These extra repayments are triggered by the prevailing low savings deposit rates and tax-related incentives such as means testing for elderly care and the temporary raising of the tax-free gift threshold (for a more detailed analysis, see our February Housing Market Quarterly).
A further incentive for people to make extra mortgage repayments is found in the mortgage interest rates set by mortgage lenders. Mortgage issuers are increasingly applying tiered interest rates: the higher the mortgage in relation to the value of the property, the higher the rate charged. This interest rate differentiation provides an incentive to mortgage-holders to pay off more of their loan and thus be eligible for a lower rate.
As discussed in Chapter 2, we expect a further rise in home sales in 2014 and a gradual increase in house prices. This will lead to a further increase in the volume of newly issued mortgages. At the same time, we expect the rate of mortgage repayments to remain relatively high this year. On balance, total mortgage debt in 2014 will increase only marginally, if at all.
3.2 NHG limit back to original level
In September 2009 the maximum amount for a mortgage covered by the National Mortgage Guarantee (NHG) was raised from € 265,000 to € 350,000. Thanks to this ceiling raise, a large proportion of mortgages taken out in the subsequent years is covered by a NHG guarantee. From 1 July 2012 the ceiling was lowered incrementally, and since 1 July 2014 is back at the original level of € 265,000.
In the coming years the ceiling is to be lowered further: on 1 July 2015 to € 245,000, on 1 July 2016 to € 225,000, and subsequently to track the average house price (Figure 3). Thus the NHG returns to its core task: enabling home ownership for lower-income households. The consequences of the threshold reduction are discussed comprehensively in our Special Report Consequences of changes to NHG.
3.3 Further drop in mortgage interest rates
Mortgage interest rates have been declining since mid-2011, particularly for fixed rate periods of up to ten years (Figure 4). In June 2014, the average rate for new issuances was 3.1% for a fixed rate period of one to five years, and 3.8% for a fixed rate period of five to ten years (DNB). A year earlier these rates were 3.6% and 4.4%, respectively. Mortgage rates for fixed rate periods of up to ten years are now lower than the previous historic low of 2005.
The so-called 'reference rate' may not however, be lower than the statutory minimum rate of 5%. Together with income level, the reference rate is used to determine the maximum mortgage amount permitted for the purchase of a home if a mortgage with a fixed rate period of less than ten years is chosen. In the case of fixed rate periods of ten years or longer, the actual mortgage rate offered forms the basis for the calculation. This means that house buyers who opt for a shorter fixed rate period may not obtain a bigger mortgage just because mortgage rates have fallen. Only if they opt for a fixed rate period of at least ten years can they borrow more, taking advantage of lower rates. For those who want to take out as large a loan as possible, it is therefore an incentive to opt for a fixed rate period of at least ten years.
In recent months, capital market rates have fallen sharply. The 10 year euro swap rate stood at around 1.4% in July, the lowest point since the crisis. Moreover, residential mortgage-backed securities (RMBS) and covered bonds recently issued by banks and insurance companies show that the so-called ‘spreads’ have narrowed in recent months. These spreads can be seen as an indicator for the risk premium that banks have to pay if they want to raise capital market financing for mortgage lending. A smaller spread means that financing conditions for the financial institutions have improved.
We expect that capital market rates will rise only modestly 2014, edging towards 1.6% over six months and 2.0% over twelve months. Nor do we consider a sharp rise in mortgage rates to be likely. Accordingly, the current favourable financing conditions will continue to contribute to the recovery on the housing market.
 In practice, some 70% of all new completions are sold to existing home owners.
 Households who indicate a wish to move within two years.
 This also concerns homes not yet sold. This is why the duration of supply is considerably longer than the average selling time in that quarter.
 All other variables that can influence supply remain constant.
 The reference rate (Dutch: toetsrente) is determined in principle by calculating the average ten-year fixed interest mortgage rate for the main mortgage lenders. However, since this year, a minimum rate of 5% applies.
Badir, M (2014). Stijging uitzenduren goed nieuws voor Nederlandse arbeidsmarkt, Rabobank.
Boumeester, H. (2013). Consumentenvraag naar koopwoningen, inleiding tijdens de cursus De markt van koopwoningen: recente ontwikkelingen en perspectieven 2013, 27-11-2013, Doorn (TU Delft/Faculteit Bouwkunde/OTB-Onderzoek voor de gebouwde omgeving).
Dalen, P. van (2014a). Gevolgen veranderingen NHG in kaart, Rabobank.
Dalen, P. van (2014b). Nederlandse woningmarkt verbetert verder in het tweede kwartaal, Rabobank.
Dijkhuizen, M. van (2013). Verliesaversie op de woningmarkt,CPB.
DNB (2012). Overzicht Financiële Stabiliteit, Voorjaar 2012, De Nederlandsche Bank.
Giesbergen, B. (2014). Herstel op de woningmarkt en consumptie woninginrichting: een vliegwieleffect, Rabobank.
Groot, C. de, Manting, D. en S. Boschman (2008). Verhuiswensen en verhuisgedrag in Nederland, PBL.
Hofs, Y. (2014). Families en subsidies achter herstel op de woningmarkt. Volkskrant.
Kadaster (2014). Vastgoedcijfers.
Ministerie van Binnenlandse Zaken en Koninkrijksrelaties (2013). Wonen in ongewone tijden.
NVM (2014). Woningmarktcijfers: 2e kwartaal 2014.
Priemus, H. (1978). Volkshuisvesting: problemen, begrippen, beleid. Alphen aan den Rijn: Samsom.
Vries, P. de (2014a). Herstelvermogen van huishoudens die onder water staan, Rabobank.
Vries, P. de (2014b). De gevolgen van de terugkeer van de annuïteitenhypotheek, Rabobank.
The Dutch Housing Market Quarterly is a publication of the Economic Research Department (KEO) of Rabobank Nederland. The view presented in this publication has been based on data from sources we consider to be reliable. Among others, these include EcoWin, Land Registry, NVM, DNB, CPB and Statistics Netherlands.
This data has been carefully incorporated into our analyses. Rabobank Nederland accepts, however, no liability whatsoever should the data or prognoses presented in this publication contain any errors. The information concerned is of a general nature and is subject to change.
No rights may be derived from the information provided. Past results provide no guarantee for the future. Rabobank and all other providers of information contained in this brochure and on the websites to which it makes reference accept no liability whatsoever for the brochure’s content or for information provided on or via the websites.
The use of this publication in whole or in part is permitted only if accompanied by an acknowledgement of the source. The user of the information is responsible for any use of the information. The user is obliged to adhere to changes made by the Rabobank regarding the information’s use. Dutch law applies.
The Economic Research Department is also on the internet: www.rabobank.com/economics
For more information, please call the KEO secretariat on tel. +31 (0)30 – 216 6666 or send an email to ‘firstname.lastname@example.org’.
Pieter van Dalen, Theo Smid, Leontine Treur and Paul de Vries
Tim Legierse, head of Head Domestic Research, Economic Research Department
Pieter van Dalen/Reinier Meijer/Selma Heijnekamp
© 2014 - Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., the Netherlands