Stabilisation of the housing market continues
Dutch Housing Market Quarterly
The Dutch housing market stabilised in the last six months of 2013. Sales increased and the price of existing owner-occupied houses remained unchanged. In 2014 we expect a modest increase in sales and a stabilisation of house prices.
This Dutch Housing Market Quarterly can be downloaded here as a pdf-file.
The completion date of this study is 7 February 2014.
Cautious recovery appears sustained
During the course of 2013, the Dutch economy gradually emerged from the slump. For 2014 we expect to see limited further growth of economic activity, albeit largely coming from international trade. Consumer confidence improved considerably during the past half year. The decline in real disposable household income will be much less marked this year than in the past two years. In fact, purchasing power will rise in households that are not confronted with a job loss. Nonetheless, the recent experience of loss of real disposable income and declining house prices will continue to dampen private consumption this year.
Housing market stabilising, but rapid recovery unlikely
2013 was another tough year for the Dutch housing market. House prices declined by 6.4% compared to the average of 2012 - a slightly larger drop than the 6.3% year-on-year decline in 2012. In 2013, transaction numbers reached only 110,103 - a new low. The 6.1% year-on-year decline in sales was the largest in three years. For the most part, this decline occurred in the first half of 2013, with the recovery getting underway in the second half of the year.
In the fourth quarter of 2013, sales of existing homes went up sharply, quarter-on-quarter, reaching the highest number since 2009. Nonetheless, with a total of 110 thousand transactions, fewer houses were sold in 2013 than in 2012. This was partly due to the fiscal reforms of 1 January 2013, which induced households to expedite their house purchase before year end 2012. House sales dropped accordingly in the first months of 2013. Based on improved affordability and palpably less negative sentiment, we expect to see a rise in house sales in 2014. However, the rise will be modest, as borrowing capacity has declined in recent years and a relatively large number of households are still saddled with potential negative equity.
Existing homes prices (PBK-index) remained unchanged, on balance, in the second half of 2013. Prices are now 20% lower than the peak of 2008. Consequently, affordability has improved, as the decline in disposable income has been less rapid. We expect prices to bottom out during the course of 2014, but they will not rise quickly.
Change to mortgage standards and interest rate not very significant
The total outstanding mortgage debt in the Netherlands declined for the first time in decades last year. The decline can be attributed to a drop in the number of new mortgages and a rise in redemptions of existing mortgages.
The maximum amount that can be borrowed on the basis of income (NIBUD - National Institute for Family Finance Information) and the loan-to-value ratio (LTV) were lowered slightly as of 1 January 2014. During the course of the year, the amount covered by NHG guarantee will also be reduced. Despite these measures, it has become slightly easier to finance a house. Our expectation of a modest rise in capital market interest rates leads us to believe that mortgage interest rates are unlikely to rise sharply. Combined with the limited adjustments to mortgage lending standards, we do not believe that financing conditions in 2014 will stand in the way of a modest recovery of sales numbers and stabilisation of house prices.
Chapter 1: The beginnings of economic recovery
During the course of 2013, the Dutch economy emerged from recession. After two years of virtually uninterrupted contraction, economic growth picked up gradually in the third quarter. Moreover, sentiment indicators and production data from the manufacturing industry lead us to expect strong results from the fourth quarter. For 2014, we expect to see modest further growth of economic activity. However, this will come chiefly from international trade. A continuing decline in household spending will dampen the recovery for the time being.
International trade made a mildly positive contribution to economic growth last year. However, this was largely due to a drop in imports. At 2%, export growth as such was very low. Economic prospects improved towards the end of 2013 for a number of important trading partners, such as the US, the U.K. and Germany. As a result, export growth will pick up this year. Thanks to increased activity in the export sectors, we expect that corporate investment will increase modestly in 2014 (Table 1).
Table 1: Core Data, The Netherlands
Source: Statistics Netherlands, Rabobank
In the latter months of 2013 and in January of this year, there was a clear decrease in pessimism among consumers. In particular, there was a marked drop in uncertainty about the economic situation. For the first time since early 2011, consumers were largely optimistic about the economic climate for the coming 12 months. Likewise, there was a major improvement in how consumers rate their financial situation for the year ahead. Despite this improvement in sentiment, there is not much more willingness to make major purchases. Accordingly, the rise in confidence will not translate immediately into increased spending.
There are a number of reasons for the reduced pessimism. First, the fear of a resurgence of the European debt crisis has abated. Moreover, purchasing power will increase this year for the first time in four years. As inflation has fallen considerably, this year will see an end to real wage decline (Figure 1). The decline in inflation of recent months is largely due to the disappearance of the price increasing effect of the VAT hike of October 2012. Other contributory factors are the reduction in motor fuel prices as well as the strength of the euro vis à vis the dollar, compared to a year earlier. Although inflation will be considerably lower than last year, the relatively high inflation of 2013 will still be reflected in the rent increases which are to take effect from 1 July 2014. We expect the inflation rate to average at 1% in 2014.
Purchasing power received a further boost because pension funds did not have to reduce pensions and pension rights as much as last year. In some cases there is even room to increase pensions again. ABP, for instance, increased its pensions by 0.5%, thus effectively reversing the cut of early last year. Pension Fund Zorg & Welzijn (Care & Wellbeing) applies an indexation of over 0.9%. Together both funds represent over a third of all pension recipients. The tax rate in the first bracket is to be lowered temporarily, and lower-income households will benefit from higher levy reductions. Another factor contributing to improved sentiment may be the return to calm on a number of policy issues such as the housing market and social security.
Unemployment has remained virtually stable in recent months. According to the European Commission's consumer survey, the share of consumers expecting a further rise in unemployment has declined (Figure 2). Furthermore, the situation on the housing market also seems to be stabilising (see Chapter 2). In the second half of 2013, the financial position of households improved, partly thanks to rising stock markets.
Consumer remains cautious
Notwithstanding the reduced pessimism, the improved housing market situation and the stabilisation of unemployment, we expect to see a further decline in private consumption this year. Economic growth will likely not be sufficient to prevent a further drop in employment. Certain sectors of industry will first want to drive up production per employee before taking steps to hire new staff. Unemployment will rise further accordingly, and can be expected to average 7½% in 2014. And although purchasing power will increase this year, real disposable income will drop as a result of a further decline of employment. Added to this is the fact that some home-owners are in negative equity due to the decline of house prices in recent years. Furthermore, the decline in consumption of the past two years has lagged behind the decline in real disposable income. We expect therefore that this combination of factors will lead to a further contraction in consumer spending in 2014. The cautious sentiment among consumers will also affect the housing market in the years ahead.
Chapter 2: Existing Homes Market
2013 was a tough year for the Dutch housing market. House prices declined by 6.4% compared to the average of 2012 - just above the drop of 6.3% in 2012 on the previous year. In 2013 transactions reached a new trough, at a total number of 110,103. The 6.1% decline in sales compared to the previous year was the largest drop in three years. Most of this decline occurred in the first half of 2013. In the second half of the year, a recovery got underway. The number of houses changing hands grew sharply (seasonally adjusted), and prices remained fairly stable on balance (Figure 3).
Figure 3: Rise in sales, prices flattening out
Source: Statistics Netherlands, Rabobank
In the fourth quarter of 2013 considerably more second-hand homes were sold than in the third quarter. The number of sales in the fourth quarter was the highest since 2009. Nonetheless, the annual total of 110,103 transactions was lower than in 2012. This can partly be attributed to the fiscal reforms of 1 January 2013, which led house-buyers to close the deal before the end of the year in 2012, at the expense of sales numbers in 2013. Based on improved affordability and the significantly less negative sentiment, we expect to see an increase in sales in 2014. However, the rise will be modest, as borrowing capacity has declined in recent years and a relatively large number of households are still saddled with potential negative equity.
Sustained rise in sales
In the fourth quarter of 2013, 35,968 homes changed hands. On a quarterly basis, this was the third successive rise in 2013. The fourth quarter was higher than the preceding quarters, and was also high by comparison with other years. On a year-on-year basis too, more houses were sold in the fourth quarter of 2013 than in the same period in 2012 (+0.7%). This is remarkable in view of the sharp rise in sales in the last quarter of 2012, as house buyers rushed to take advantage of the fiscally favourable mortgage opportunities still available until the end of that year. Moreover, the NIBUD mortgage standards have been significantly tightened since 1 January 2013 (see Chapter 3). In the last quarter of 2013 major policy changes were also afoot. Owing to the sharp drop in sales numbers in early 2013, total transactions for the year (110 thousand) were lower than in 2012 (117 thousand). Nonetheless, the second half of 2013 largely made up for a poor first six months. In the fourth quarter, sales were even up on the same quarter of 2010 (Figure 4). Back then, measures such as the tightened NIBUD standards and the reduction of the NHG guarantee ceiling had not yet been introduced. The effects of these include a relative dampening effect on house sales (OTB, 2011).
The outlook for the first quarter of 2014 is good. The number of sales contracts registered with NVM-estate agents reflects current market developments for over 70-75% of the market (two to three months earlier than the Land Registry). At 27,018, the number of contracts was the highest since the fourth quarter of 2007. This was a positive surprise and indicates a relatively strong increase in the number of sales recorded with the Land Registry in the first quarter of 2014. Thus the total number of sales contracts for 2013 (87,556) exceeds the total for 2012 and is close to the level of 2011.
Figure 4: Quarterly and annual transactions
Source: Statistics Netherlands, Land Registry
Supply declining as transactions rise
Thanks to the rising number of houses sales, unsold housing stock declined in the last quarter of 2013, falling by 5.2% to 212,468 properties for sale. This means there are over 7% fewer houses on the market than in December 2012. Thus the current situation differs from the temporary stabilisation of 2010, when supply actually rose (Figure 5). However, the current level of supply is considerably higher than then, and buyers still have a lot of choice and are in a good bargaining position. This is certainly the case for more expensive properties. That said, their position is beginning to weaken, gradually. The shortage indicator, that divides total supply by the number of transactions currently stands at 18. This compares to 29 at the beginning of 2013 (Figure 6). Moreover, the average selling time declined during the fourth quarter of 2013 to 154 days. In December 2012 it took as long as 171 days to sell a house.
Factors related to the increase in residential property sales
The increased number of transactions can be explained by four factors. First, prices have fallen by over 20% (in nominal terms) since 2008, while gross disposable household income has dropped by 2% in the same period. Despite the tightening of mortgage lending standards (see Chapter 3), affordability and financeability have improved as a result. According to Calcasa (2013), affordability has improved by as much as 41.2% since the peak of 2008. This is especially favourable for first-time buyers, who would have had difficulty purchasing a house before the crisis. First-time buyers are, therefore, currently able to purchase a house that would previously have been beyond their reach A second factor is that confidence in the housing market – as measured by the Home-owners market indicator of the Dutch Home-owners Association – has risen for twelve successive months since January 2013. In January this year, the indicator registered the highest reading (85%) since 2008. In the past, confidence, lagging by 8 months had a predictive effect. Although this effect has weakened significantly in recent years, we believe that the strong improvement in confidence will support sales figures. It seems that house-seekers are currently more favourably disposed to buying the house than has been the case in recent years. We can therefore expect to see a rise in sales. The structure of the housing market will not permit sales to rise at the same pace as confidence, but we do expect that confidence will support a rise in sales numbers (Figure 7).
Thirdly, it appears an end has come to the ongoing discussion about policy reform on the housing market. Consumers now know where they stand when they want to buy a house. Fourthly, on the rental market, rent increases have become more marked than in recent years. The rental market remains an underdeveloped alternative and the cost of buying, after tax relief, is still lower than renting.
Figure 7: Confidence points towards increase in transactions
Source: VEH, Data processing, Rabobank
Impediments to recovery in sales
The expected increase in sales in 2014 is likely to be modest. Of 861,000 house-seekers, over 250,000 households (28%) are potentially in negative equity . It will be difficult for this latter group to move house. Although a residual debt can be carried forward to the next mortgage, the monthly costs will be much higher, which can be a deterrent to moving house. Since a rapid rise in house prices is not expected in the short term, this problem will dampen the increase in house sales for the coming years. Meanwhile, we see that the selling time of houses on the market continues to rise. 14% of properties for sale have now been on the market for over three years (Figure 8). AT the same time, as was stated earlier, the average turnover time is declining. Thus a dual development in the housing supply is emerging: houses that are new to the market are selling more quickly, but properties that have been for sale for over a year are becoming increasingly harder to shift (NVM, 2013). Perhaps these are priced too high, with vendors unwilling to accept a loss (CPB, 2013). In any case, this holds the market back from more rapid growth. In addition, unemployment is expected to rise further, possibly limiting the demand for home ownership. Moreover, the mortgage lending standards are set to be tightened further this year (see Chapter 3). Finally, it is important that political certainty about the housing market continues to prevail. New measures could lead to fresh uncertainty and could impede the recovery in sales.
We expect that the positive factors will have a somewhat stronger effect on the recovery in sales than the impediments and that the increase in transactions that took off in the second half of 2013 will continue in 2014, albeit cautiously. If the average number of sales that took place in the second half of 2013 (seasonally adjusted) continues in 2014, we should see at least 120,000 house sales registered with the Dutch Land Registry this year. However, the transaction numbers for 2014 still contain a policy effect: an expected lowering of the NHG guarantee ceiling (from € 290.000 to € 265.000) may provide an extra incentive for potential buyers in this segment to go ahead with buying a house. This could lead to a spike in sales numbers just before the deadline, followed by an immediate dip. While this will have little impact on an annual basis, it is important to bear it in mind for the correct interpretation of the monthly data.
Figure 8: Old supply still increasing
Existing homes prices (PBK-index) showed signs of stabilising in the second half of 2013, remaining unchanged, on balance. Prices are now 20% lower than the peak of 2008. Consequently, affordability has improved, as the decline in disposable income has been less rapid. We expect prices to bottom out during the course of 2014, but they will not rise quickly
Price slump over
House prices declined slightly in the fourth quarter of 2013. On a quarterly basis, the drop amounted to 0.2%, following a rise of 0.4% in the third quarter. Accordingly, house prices showed signs of stabilising during the course of 2013. On balance, house prices remained unchanged during the second half of the year. On a year-on-year basis, prices did decline, but as already stated, the short term development has been around 0% for the past half year (Figure 9).
The factors outlined above that explain the rise in transactions will further support price stabilisation in year ahead. Because unsold stock is diminishing, the bargaining position of buyers is weakening somewhat. Although is unfavourable for buyers, it will contribute to price stabilisation, as the bargaining position of vendors will improve.
In addition to the CBS index, other price indices confirm the stabilization of prices (Figure 10). Accordingly, we expect prices to bottom out this year. If the current price level (December 2013) remains unchanged, the first annual price rise will be recorded in May 2014. This may give further impetus to confidence in the housing market. The Dutch news media usually focus on year-on-year price trends. For this reason, many people may be unaware of the stabilisation that has taken place during the past half year.
In our last Housing Market Quarterly we stated our belief that a recovery of sales numbers and house prices would take time. While the incipient recovery has gained momentum in the past quarter, various developments have taken place since the crisis which will keep the brakes on house prices for the time being. First, the tightened mortgage lending standards (see Chapter 3) have imposed a ceiling on prices. House-buyers on the same income as before can now borrow less. Moreover, we envisage only a modest rise in nominal disposable household income (Chapter 1). Second, the problem of negative equity will continue to dampen the rise in sales (see 2.1), which will prevent prices from rising rapidly. So the difference between the asking price and the actual selling price will remain sizeable (Figure 11). Third, although supply has decreased in recent months, it may well increase fairly soon, as the stabilisation of the market may induce more vendors to put their house on the market. The resulting extra supply will slow down the price rise. The coming months will reveal the extent to which supply keeps apace with rising sales. Finally, the recovery of the Dutch economy remains fragile. The same factors that restrain growth of private consumption and limit the increase in sales numbers mean that a rapid increase in house prices is unlikely.
Despite these impeding factors, the stimulating indicators, such as high confidence and good affordability are expected to contribute to price stabilisation. We therefore envisage a bottoming out of prices during the course of this year. If the current price level remains stable, the entire year of 2014 will see a decline of 0.3%, because of the relatively higher level in 2013. Although the actual decrease could be slightly higher, the price decrease in 2014 will be remarkable lower than in the past years.
Figure 11: Difference between asking price and selling price
Source: Huizenzoeker.nl, Statistics Netherlands
Pieter van Dalen
Chapter 3: Mortgage Developments
3.1 Decline in total mortgage debt
Total outstanding mortgage debt declined in 2013 for the first time in decades. At the end of 2012, total mortgage debt of Dutch households stood at € 651 billion; by the end of the third quarter of 2013 it had fallen to € 645 billion (Figure 12). At the time of writing, quarterly figures for total mortgage volume (including mortgages issued by insurers and pension funds) are not available for the fourth quarter of 2013. However, on the basis of available monthly figures on mortgages issued by banks, we estimate that total mortgage debt will remain at the same level or show a further decline in the fourth quarter. The decline in outstanding mortgage debt in 2013 can be attributed to a decrease in the number of new mortgages and a rise in repayments on existing mortgages.
Figure 12: Volume of existing mortgages
In line with the decline in the number of house sales and falling house prices, the amount of new mortgages issued in 2013 was lower than in the previous years. The drop in refinancing was even more marked (Figure 13).
Figure 13: Mortgages issued 2008-2013
Source: Land Registry
As was discussed in Chapter 2, we expect to see an increase in the number of houses sold in 2014 and a much less sharp drop in house prices. This will enable the number of mortgages issued to rise again.
The decline in total mortgage debt means that repayments have risen. Household savings deposits have risen much less sharply than in previous years. In our view, this low growth of savings is not related so much to higher consumption, but to households "shortening their balance sheets" and paying off debt (Figure 14).
Figure 14: Changes in savings deposits and mortgage debt
Source: DNB (*data mortgage debt until 2013Q3)
Home-owners have various reasons for wanting to pay off more of their mortgage. One reason is that it reduces the likelihood of negative equity if they want to move house. Furthermore, the low savings deposit rate (see additional graphs) makes it les attractive to hold savings deposits outside a mortgage. Finally, there are some possible tax incentives. For example in 2013, there was a tax incentive to release money from so called ‘levensloopspaarrekeningen’ (life-cycle deposits); for holders of a ‘stamrecht B.V.’ (annuity-B.V) there is a similar tax incentive in 2014. This year, will also see a temporary reduction of the rate in box 2 in order to encourage director-major shareholders to pay out dividends from their firm’s profit reserves.
Moreover, a new incentive for older people to reduce their so-called 'box-3 assets' has been introduced. This is because of the means test for contributions to (long-term) care which was modified to include various box 3 assets on 1 January 2013. The family home is excluded from the box 3 definition of taxable capital, in contrast to second homes or rented or vacant houses. Well-off older people may therefore opt to reduce their mortgage or to gift part of their wealth. In addition, the rules for gifting have been temporarily relaxed: from 1 October 2013 through 31 December 2014 gifts of up to € 100,000 are exempt from tax if the recipient uses it towards home-ownership costs. These can be the costs of house purchase, home improvements, mortgage redemption, paying off a residual debt or buying out a leasehold. The recipient does not have to be a son or daughter of the donor and nor is there an age limit.
Home-owners who are sufficiently well off to be in a position to make extra repayments tend to be older households whose home is not in negative equity. These additional repayments are mainly designed to optimise their financial position. The impact on the problem of negative equity is largest in case of gifting to younger (prospective) home owners. We therefore expect that the relaxation of the rules for gifting will have a positive impact on the problem of negative equity and will contribute somewhat to the dynamics of the housing market.
Based on the above factors, we expect to see a continued relatively high rate of mortgage redemptions in 2014. If house sales numbers - and accordingly new mortgage issuances - rise to the level of 2011, then the total mortgage volume will remain unchanged in 2014, or may rise slightly at most.
3.2 Reduction of maximum mortgage in 2014
Both the maximum amount that may be borrowed on the basis of income (NIBUD) and the maximum loan-to-value of the property (LTV) have been reduced slightly as of 1 January 2014. During the course of the year, the NHG guarantee ceiling will also be lowered.
Since 1 January 2014 the maximum mortgage amount in relation to the value of the property (loan-to-value) has been reduced to 104% (from 105% in 2013). This means a difference of € 2000 on a purchase price of € 200,000, for instance. Maximum LTV will be reduced annually by 1% until 100% in 2018. This means that potential house purchasers will increasingly need to have savings in order to cover the costs of estate agents and legal fees as well as the costs of furnishing or any home improvements.
NIBUD sets the annual maximum financing cost rate for various income brackets and interest rates. The financing cost rate is the percentage of income that may be spent on mortgage costs. Since 1 January 2014m this percentage has been adjusted downward, which has slightly reduced the borrowing capacity of households on a certain income. However, this reduction is much smaller than the cut which took place a year earlier. Figure D shows the maximum mortgage amount for interest rates of between 4.5 and 5%, for various years.
The financing cost percentages for 2014 were communicated in early November 2013; at that time, the NIBUD was assuming a decline in purchasing power in 2014. Along with the CPB (Netherlands Bureau for Economic Policy Analysis) we expect that purchasing power will in fact rise slightly this year, which may mean that the reduction was unnecessary.
Figure 15: Comparison of maximum mortgage amount (NIBUD-standard) 2010-2014
Source: NIBUD, Rabobank
Incidentally, the nominal disposable income of households is set to rise slightly this year as discussed in Chapter 1. Consequently, we expect that the impact of the new adjustment on house prices and transaction numbers will be negligible.
The cost ceiling for a mortgage with a NHG guarantee currently stands at € 290,000. On 1 July 2014 this ceiling will be lowered to € 265,000. During the coming years, the ceiling for the national mortgage guarantee will be lowered annually: to € 245,000 on 1 July 2015, € 225,000 euro on 1 July 2016 and subsequently down to the level of the average house price.
Notwithstanding the factors discussed here which impose a modest limitation on the maximum mortgage amount, the ‘financeability’ of houses has in fact improved, This is due to the decline in house prices (see paragraph 2.2) and interest rates.
Mortgage rates back at pre-crisis level
Mortgage rate have declined since mid-2011, particularly for fixed-interest periods of less than 10 years (Figure 16).
Figure 16: Interest rates for new mortgages
In late 2013, the average rate for newly issued mortgages stood at 3.43% for a fixed interest period of over 1 up to 5 years; and 4.10% for a fixed interest period of over 5 up to 10 years (DNB, December 2013). At the beginning of 2013, the rates were 3.89% and 4.65%, respectively. Thus fixed interest rates for periods of less than ten years have returned to the pre-crisis level.
We expect to see only a slight rise in capital market rates in 2014. In January this year, the 10 year-swap rate registered around 2.0%. We expect to see a rise to 2.20% over 6 months and to 2.40% over 12 months.
In addition, it appears from recent issues of residential mortgage-backed securities (RMBS) and covered bonds by banks and insurers that the spreads have narrowed in recent months. These spreads can be regarded as an indicator of the risk premium that has to be paid when attracting funding on the capital market for the purpose of issuing mortgages. A decline in the spread indicates an improvement in the borrowing conditions for financial institutions. Together with the expected modest rise in the swap rate, this implies that a sharp rise in mortgage rates is unlikely. It also implies that, in spite of the limited reduction of the maximum mortgage amount, financing conditions will not constitute a barrier to recovery on the housing market.
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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.
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Text contributors: Pieter van Dalen, Paul de Vries and Frits Oevering
Editor-in-chief: Tim Legierse, head of Head Domestic Macroeconomic Research, Economic Research Department
Graphics: Pieter van Dalen/Selma Heijnekamp
Production coordinator: Christel Frentz
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