Driven by high inflation, rising interest rates and increased economic uncertainty, the Dutch housing and mortgage markets are cooling down, marking the end of a period of consecutive records. Most noticeable is that after 8 years of steep house price growth, house prices are slightly declining.
Mortgage market volumes continue to decline due to the lower refinancing activity and the fall in housing transactions. The dominant fixed rate period has shifted from longer (≥20 years) to shorter (≤10 years) ones. Nonetheless, the market for longer fixed interest rate periods is, due to a flat yield curve, still substantial with a market share of 34% last quarter. Mortgage spreads remain volatile as a result of fluctuating interest rates.
Main developments
Persistent inflation continues to negatively affect consumer confidence, as inflation is slowly converting into a lower purchasing power. The impact of inflation continues now that the majority of Dutch households have to sign new energy contracts with significantly higher tariffs and the higher energy costs are seeping into production costs resulting in higher prices for consumer products.
The European Central Bank (ECB) continued its restrictive monetary policy in order to slow down the economy and hence control inflation. In parallel, the Dutch government implemented support measures to limit the impact of rising energy costs on households and small and medium-sized enterprises (SMEs).
Pressed by higher interest rates, households' maximum borrowing capacity has been reduced. As a result, borrowers' preference for fixed-interest periods continue to shift from longer to shorter fixed-interest periods. The corresponding market share of mortgage applications with 10- and 20-year fixed-interest periods increased to 56% and 27% respectively. A year ago it was the opposite at 21% and 57% respectively.
Refinancing became less attractive as mortgage rates continued to be high. As a result, the group of refinancers (primarily lower LTV buckets) withdrew from the market. The withdrawal of refinancers combined with the reduced borrowing capacity of households led to a substantial decline in mortgage applications to 102,000 (-13.8% YoY) and a subsequent decline in mortgage volume to €38 billion (-7.8% YoY).
Another important development in the mortgage market, is that borrowers gradually start taking their existing mortgage conditions to a new property, the so-called ‘movers’ feature (meeneemregeling). This is particularly attractive for borrowers now that the mortgage rates are higher.
The housing market is increasingly showing signs of a further cooldown as the economic situation persists. While buyers become more cautious, the number of transactions in the Dutch housing market fell to roughly 50,000 (-6.4% YoY). However, the most remarkable development is the decline in house prices measured by the NVM (-5.3% QoQ).
The fall in house prices is driven by a couple of developments. First, the borrowing capacity of households is reduced as a result of increased mortgage interest rates. Second, the yearly seasonal effect of the summer period caused less demand. Third, consumers’ willingness to overbid declined. And lastly, demand in more expensive regions and higher price segments decreased.
Similarly to previous quarters, uncertainty in the financial markets was reflected in volatile mortgage rates and subsequently affected mortgage spreads. After a widening of spreads at the beginning of the quarter, spreads tightened substantially before widening again at the end of Q3 2022.
Economic indicators
Ongoing inflation is working its way through to the overall economic situation in the Netherlands. Whereas previous inflation was assumed to be a temporary shock, the temporary nature is increasingly turning into a long-term phenomenon with associated side effects.
Economics
According to the International Monetary Fund (IMF), inflation is currently the most urgent threat to the global economy and is expected to remain high in the near future. High inflation and the resulting deterioration of household purchasing power are likely to coincide with a slowdown in economic growth. According to the Dutch Central Bureau of Statistics (CBS), the slowdown of the economy is also apparent in the Netherlands (-0.2% QoQ). This was mainly attributed to lower investments because of higher interest rates.
As the economic outlook is deteriorating, policymakers are taking an even more aggressive approach to monetary tightening. In recent months, this aggressive approach has led to an increase in ECB policy rates by 1.5% [1]. The ECB expects to continue raising interest rates in the coming months to return to its inflation target of 2%.
While the ECB attempts to slow down the economy by raising its policy rates, the government is spending billions on a support package instead. Although it makes sense for the government to provide this support for households and to a lesser extent to small and medium-sized enterprises (SMEs), it does have the opposite effect on the monetary tightening of the central bank.
Inflation
Inflation was initially caused by disruptions in the supply chain and created a mismatch between supply and demand. Currently, inflation is primarily fuelled by the war in Ukraine, which caused a major energy crisis in Europe, given Europe's dependence on Russian gas. Especially the Netherlands is strongly reliant on gas compared to other European countries since the vast majority of Dutch houses use gas heating. As a result, energy prices rose significantly in a brief period of time.
As the war continues and electricity and gas prices remain high, energy costs are driving up production costs and thus the prices of goods and services. The spillover of inflation makes current inflation even more persistent.
To limit the impact on households, the Dutch government introduced several measures. First, it lowered the energy tax on gas and electricity and increased the tax refund, resulting in a rebate for all households.
Second, the government will introduce a price ceiling for both gas and electricity as of 1-1-2023. In November and December, households will receive an extra 190 euros per month regardless of their energy consumption. Finally, households with an income around the social minimum will receive additional support to compensate for high energy prices through an energy surcharge. There is also an emergency fund for vulnerable households to support them in case of arrears on their energy bills.
Sentiment indicators
At the end of Q3 2022, consumer confidence [2] in the Netherlands reached its lowest point ever (41). The lack of confidence is still motivated by pessimism about the economic outlook and the financial situation of households for the next 12 months. As a result, the willingness to buy non-essential and more expensive goods declined.
While confidence in the housing market [2] often lags falling confidence in the general economy, housing confidence is declining too. The negativism about the housing market is mainly caused by higher mortgage rates (reducing the borrowing capacity), house price development and the general economic climate.