Dutch housing and mortgage market Q1 2023

Persistent inflation continues to have an impact on Dutch households. In order to control inflation, the European Central Bank (ECB) has raised its key interest rate for the seventh time, from 0% in Q1 2022 to 3.25% currently.

High interest rates have fundamentally changed the Dutch housing and mortgage market. In Q1 2023, the number of house sales (-21%), house prices (-1.6%) and mortgage origination volumes

(-23%) dropped. When moving to a new house, borrowers increasingly use the porting option to benefit from the historical rates of their mortgage. Not surprisingly, a growing share of the new mortgage origination comes from first-time buyers.

Main developments

In an attempt to slow down the economy and control inflation, the ECB continues to pursue a tight monetary policy. The impact of these measures, especially higher interest rates, is slowly becoming apparent in society. Monetary policy affects not only interest rates, but is also indirectly translated into tighter credit conditions by banks and other financial institutions.

The tight Dutch labour market provides an important protection against the high level of inflation. Over the past months, both wage settlements and agreed wage increases have risen significantly as companies seek to retain staff and are willing to compensate for the loss of purchasing power.

These developments have a significant impact on supply and demand in the Dutch housing market. The number of houses for sale initially rose sharply, but fell again in the last quarter, suggesting that homeowners are becoming more reluctant to sell. Buyers also remain cautious and less willing to opt for a higher bid. As a result, the number of transactions fell (-21% QoQ), putting downward pressure on house prices. Despite the significant decline in the number of transactions, there were still 190,000 transactions in the housing market which is similar to the level in 2016.

First-time buyers have a growing opportunity to enter the housing market as competition declines, house prices are falling and wages have risen. The Dutch Central Bank (DNB) expects that affordability on the housing market will improve in the coming months, assuming that mortgage rates remain relatively stable.

The deterioration in the supply of new build properties results in a continuation of significant shortages in the Dutch housing market. Although the government presented its National Agenda for Housing and Construction last year, there does not seem to be any improvement at the moment. It is also questionable whether the government and/or the market will be able to make up for the significant housing shortage, given the declining number of granted building permits, rising construction costs and financially unviable projects due to higher interest rates.

In Q1 2023, the number of mortgage applications increased to 91,000 (+7% QoQ and -52% YoY). The number of mortgages originated and mortgage volume, however, were significantly lower. In Q1 2023, 73,000 mortgages were originated (-23% QoQ and -38% YoY) reaching a total volume of over 24 billion euros (-23% QoQ and -40% YoY).

The credit performance of Dutch mortgages remains strong, with low levels of losses and arrears. Even in the most severe stress tests, losses and arrears continue to be limited. Mortgage spreads continue to be volatile, but still outperform other traditional liability-driven investments (LDI), confirming the strong risk-return profile of Dutch mortgages.

Economic indicators

Energy prices fell sharply at the start of 2023, but since the higher energy prices already seeped into the economy with higher commodity and food prices, inflation is expected to remain high. In the attempt to control inflation, the ECB will maintain its tight monetary policy for as long as necessary, thereby affecting the economy.

Economics

The Dutch economy had an unusual contraction of 0.7% QoQ in Q1 2023, according to preliminary estimations by the Dutch Central Bureau of Statistics (CBS). The contraction, expected to be a one-off, is due to a deterioration in the trade balance, especially in exports. Compared to Q1 2022, the economy grew by 1.9% as consumption and investment increased. However, this comparison is somewhat skewed as a hard lockdown was in place until 25 January 2022.

In recent years, the Dutch economy has outperformed its European neighbours. However, this is no longer the case, as the economies of neighbouring European countries [1] are either growing or stabilizing. The economy of the euro area as a whole grew by 0.1% QoQ.

The ECB’s interest rate hikes are slowly gaining traction and starting to have an impact on the economy. In addition to raising its key interest rates, directly affecting mortgage rates, monetary policy is indirectly causing financial institutions to tighten their lending conditions. According to the ECB's latest bank lending survey, the recent tightening of lending conditions by financial institutions has led to a sharp decline in lending volumes in the European Union. In the first quarter of this year, banks recorded the sharpest fall in demand to lend to businesses since the credit crisis.

Inflation

In March 2023, inflation in the Netherlands fell to 4.5% YoY [2], which is a sharp decline compared with February 2023, when inflation was 8.0% YoY. The sharp decline is mainly driven by falling energy prices. To illustrate the dependency of inflation on energy prices we compared the prices for gas in March 2023 with a year ago, when the war in Ukraine began.

At the start of the war, households paid 130 euros for a megawatt-hour of gas. But in March this year the average price was ‘only’ 44 euros, a decline of more than 60%. The sharp fall in energy prices had a negative effect on inflation (as shown in the graph), masking the fact that prices are still rising on other fronts.

For example, average food prices and the core inflation, rose by 15.1% YoY and 7.6% YoY respectively in March.

Besides that, the average price for energy is a poor reflection of the current price households actually pay, as it is still based on the old, higher energy price.

Inflation is expected to remain high for a while as (i) the shock from last year's high energy prices is still working its way through to the prices of all kinds of goods and services, (ii) firms have a strong incentive to raise prices as the economy is overheated, and (iii) wage growth continues to put upward pressure on prices as many firms pass on higher labour costs to consumers.

A similar trend emerges in the eurozone, where inflation (6.9% YoY) and core inflation (5.7% YoY) show that price pressures are much more persistent than expected and desired.

Dutch housing and mortgage market Q1 2023

Sentiment indicators

Overall consumer confidence [3] continued to improve to 61 at the end of Q1 2023 (+13-points QoQ). The overall level is based on economic sentiment, the willingness to buy, the economic and financial situation of households and whether it is a favorable time for major purchases.

An important observation is that there is a strong improvement in all underlying factors with the exception of the indicator ‘favorable time for major purchases’. This suggest that households appear to be more cautious about making major purchases. Despite this, households have become more positive about the economic and financial situation over the next 12 months.

Confidence in the housing market2 remained stable at 73 at the end of Q1 2023. The negative housing sentiment is still mainly driven by higher mortgage rates (reducing borrowing capacity), declining house prices and general economic conditions. The negative sentiment is also affecting the market, as people may be anticipating future house price declines and therefore postponing their purchases.

Labour market

The improvement in consumer confidence can partly be explained by the historical wage growth in the recent period. The tight labour market also provides a high degree of job security, with an overall unemployment rate of only 3.6% in Q1 2023.

For employers, the tight labour market is an important reason to compensate employees for inflation, contributing to restoring the purchasing power of households.

The Dutch Central Bureau of Statistics (CBS) reports that wage settlements experienced a substantial increase of 5% in Q1 of 2023, which is nearly twice the rate recorded a year ago (2.7%). This marks the largest increase in wage settlements in the past 40 years. In March 2023, data from the Dutch employers' association (AWVN [4]), indicate wage settlements even surged by 7.5%, surpassing inflation for the first time in a prolonged period.

Housing market

The number of transactions and the willingness to overbid in the Dutch housing market continue to decline. As a result, house prices have fallen for the second consecutive quarter. While buyers and sellers are increasingly driven by uncertainty, financial conditions and mortgage affordability appear to have improved in recent months.

For employers, the tight labour market is an important reason to compensate employees for inflation, thereby helping to restore household purchasing power.

The Dutch Central Bureau of Statistics reports that wage settlements experienced a substantial increase of 5% in Q1 of 2023, which is nearly twice the rate recorded a year ago (2.7%). This marks the largest increase in wage settlements in the last 40 years. In March 2023, data from the Dutch employers' association (AWVN) [1], indicated that wage settlements rose by 7.5%, outpacing inflation for the first time in a prolonged period.

The significant increase in wages is beneficial for employees but must be approached carefully as it could potentially trigger a wage-price spiral. DNB notes that increased wages and resulting higher labour costs are already contributing to higher prices. The impact is currently limited, and there are no indications of a wage-price spiral yet. However, the DNB warns that this may change if wage settlements continue to increase, reaching levels of 7% to 10%.

Transaction volume and housing supply

In Q1 2023, the number of transactions fell to 40,000, a decrease of 21% QoQ. On an annual basis, the number of transactions fell by 8%.

According to the Dutch Association of Real Estate Agents (NVM), the number of houses for sale gradually increased to almost 35,000 at the end of 2022, after reaching an all-time low of 15,500 houses for sale at the end of 2021. In the last quarter, however, the number of houses for sale fell back to 31,000 (-9% QoQ).

The current state of the supply and demand dynamics can be explained by the market tightness indicator, which measures the ratio of the current number of houses for sale (supply) to transactions (demand). The ratio improved slightly to 3.3 (+0.1-points QoQ) in Q1 2023, indicating that prospective buyers have an average of 3.3 houses on offer to choose from.

Recently, the Dutch government introduced a new policy [5] on rental housing. Investors in rental housing, such as private individuals, argue that the new plans will make their investments unprofitable and threaten to sell their rental properties en masse. A potential sale of these houses could be beneficial to the housing market, but it remains to be seen whether these houses will meet current demand.

New construction and housing shortage

The promising news of last year, with a record-breaking 75,000 newly constructed homes, has swiftly been reversed at the start of 2023. With less than 7,000 permits issued and only 10,000 new homes built in the initial two months of this year, it is likely that the construction of new homes will decline further. This is particularly obvious when taking into account the declining number of permits issued at the end of 2022.

Another concerning factor is the stagnation in sales of (affordable) new homes due to reduced interest from buyers. The lack of interest is mainly due to an increased price differential between new-build homes and comparable existing ones. While prices of existing homes are falling, new-build homes have to be sold for a certain amount to cover the expenses of construction (such as building materials and labor), making it more difficult to price them competitively.

The diminishing interest in new-build homes is also evident from the data. According to the NVM, only 5,925 newly built houses and plots were sold in Q1 2023, marking the lowest figure since records began in 2013.

The problem of declining interest is not the only challenge for (affordable) new-build homes. Rising construction costs and higher interest rates are also making new construction projects financially less viable, resulting in developers deferring projects. Thousands of planned new homes are not constructed at all due to the limited number of buyers. Developers are also withdrawing homes from sale. Last year, 4,694 planned new homes were withdrawn from sale due to the lack of interest. In Q1 2023 alone, over 1,900 new-build homes were taken off the market for this reason.

House prices

After eight years of growth, Dutch house prices fell by the end of 2022 on an annual basis. According to the Land Registry, the house price index fell by 1.6% QoQ in Q1 2023 [6](and -0.7% YoY). The decline in house prices recorded by the Land Registry is in line with the downward trend published earlier by the NVM (-0.6% QoQ in Q4 2022 and -3.6% QoQ in Q1 2023 [7]). The downward trend is especially visible in the four largest cities (Amsterdam, Rotterdam, Utrecht and The Hague), while houses in other parts of the country are currently less affected.

In nominal terms, house prices fell by 2.3% YoY in Q1 2023 from 426,000 euros to 417,000 euros. Comparing the current average nominal value with the peak in August 2022 (446,000 euros), prices have already fallen by 7%, marking a significant decline in nominal house prices in recent months. Moreover, for the first time in 4 years, the average price paid was slightly below the asking price. The fall in house prices is currently leading to a more accessible market, particularly for first-time buyers.

At this point in time and at this pace, the fall in house prices does not pose a major risk because the Dutch housing market is currently in good shape. Households continue to redeem their mortgage, credit conditions are conservative and many people have fixed interest rates for longer periods making them less vulnerable to interest developments. The solid state of the Dutch housing market is also evident when comparing loan-to-income (LtI) and loan-to-value (LtV) ratios for 2021 with 2013.

The overall decline in the number of mortgage applications is increasingly reflected in the market volume. In Q1 2023, the number of originated mortgages fell to 73,000 (-23% QoQ and -38% YoY) and the mortgage volume fell to 24 billion euros (-23% QoQ and -40% YoY).

Mortgage market

The average mortgage interest rate has doubled in less than a year fundamentally changing the Dutch mortgage market. With higher mortgage rates, shorter fixed-rate periods prevail over longer fixed-rate periods, and while refinancers withdrew from the market, the porting option remained attractive.

Mortgage applications

After two quarters of decline, the number of mortgage applications rose in Q1 2023. With more than 90,000 applications in Q1 2023, the number of applications was 7.2% higher than in Q4 2022.

The Dutch Mortgage Network (HDN), which accounts for almost 80% of mortgage applications in the Dutch mortgage market, reported that first-time buyers are increasingly entering the market as affordability has improved, investors are withdrawing, and they face less competition from existing borrowers, who often have equity from the sale of their previous home.

As the mortgage interest rates remain relatively high, the shift in consumer preference from longer to shorter fixed-rate periods has stabilised. In Q1 2023, almost 70% of the market consisted of mortgage loans with a fixed rate period of 10 years or less, while 30% had a fixed rate period of 20 years or more. The market share of NHG loans [8] also increased to almost 40% in Q1 2023.

While opportunities appear to be improving for borrowers such as first-time buyers, DNB’s latest Bank Lending Survey (BLS) shows that financial institutions in the Netherlands are tightening their underwriting criteria, potentially making it more difficult to get a mortgage approved.

Number of originated mortgages and market volume

The overall decline in the number of mortgage applications is increasingly reflected in the market volume. In Q1 2023, the number of originated mortgages fell to 73,000 (-23% QoQ and -38% YoY) and the mortgage volume fell to 24 billion euros (-23% QoQ and -40% YoY).

In line with the decline in the number of mortgage applications, existing borrowers are increasingly using the mover option, which allows them to port their current mortgage conditions to a new house. At the end of Q1 2022, only 0.4% of the mortgage application volume was made up of movers, while by the end of Q1 2023, this share had risen to 13%. The significant growth of percentage movers has led to a different market dynamics as movers are inclined to stay with their current mortgage lender and not enter the market at all.

Mortgage interest rates and spreads

Interest rate hikes from the ECB (and the Fed) are increasingly starting to work their way into the global economy.

Recent surveys show that experts believe persistent inflation will keep interest rates high, increasing the likelihood of economic downturns. As a result, there is still a lot of uncertainty in the financial markets, making both mortgage rates and mortgage spreads remain volatile. In particular due to the US banking crisis, there was more volatility in Q1 2023 than in Q4 2022.

Mortgage rates have slowly inverted at the short end over the past few quarters. As a result, rates for mortgages with relatively short fixed-rate periods (<5 years) are currently higher than rates for mortgages with relatively long fixed-rate periods (>10 years). As the curve is only inverted at the short end and flat at the long end, spreads at the longer end are relatively good.

Mortgage performance

The Dutch mortgage market continues to perform very well with low levels of losses and arrears. Moreover, there are still no signs of a substantial increase in the number of losses or arrears. The same is also observed by the Dutch National Credit Register (BKR), which reported a downward trend in the level of losses and arrears in its latest annual report.

To provide a projection of losses for the coming year in the Dutch mortgage market, we use public mortgage loan data (European DataWarehouse) as input for stress tests in Moody's Portfolio Analyser. The stress tests are based on 4 macro scenarios as described below.

In all scenarios losses are expected to remain very low:

The baseline scenario assumes that the economy experiences a period of stagnation and returns to robust growth in the second half of 2023. Global oil prices remain around current levels until mid-2023, while inflation declines throughout 2023. The European Central Bank continues to tighten policy rates in the spring before pausing in the summer.
The stronger near-term growth scenario assumes a strong recovery in both demand and supply. While demand is driven by households spending their excess savings, supply is driven by productivity gains. The ECB temporarily raises policy rates slightly more than in the baseline, using the stronger-than-expected economic momentum to step up the fight against still-high inflation.
The Moderate Recession scenario assumes that geopolitical tensions, triggered by the invasion of Ukraine but also between the US and China, escalate, leading to a sharp deterioration in European economic sentiment and further disruptions in supply chains, exacerbating shortages of manufactured goods and pushing up prices. The recession and the associated weakening of the medium-term inflation outlook lead the ECB to end its tightening cycle.
The Protracted Slump scenario assumes that geopolitical tensions lead to a sharp deterioration in European economic sentiment and further disruptions in supply chains, exacerbating shortages of manufactured goods and pushing up prices. A prolonged period of low investment in innovative industries and human capital weighs on productivity growth, reducing the long-term level of GDP. Faced with a collapsing economy and rapidly slowing inflation, the ECB quickly reverses course and takes policy rates back into negative territory.

Number	Scenario	Arrears amount[10]	Expected loss[11]
1	Baseline	14.8bps	1.8bps
2	Stronger Near-Term Growth	14.5bps	1.8bps
3	Moderate Recession	16.1bps	2.0bps
4	Protracted Slump	17.3bps	2.2bps

Annex I: Key indicators

Indicator	Q1 2022	Q2 2022	Q3 2022	Q4 2022	Q1 2023	Q-o-Q	Y-o-Y
Consumer confidence	61	50	41	48	61	+13 points	0 points
Housing market confidence	95	87	83	73	73	0 points	-22 points
General unemployment	3.5%	3.3%	3.7%	3.6%	3.6%	0.0%-point	+0.1%-point
Inflation	9.7%	8.6%	14.5%	9.6%	4.4%	-5.2%-point	+5.3%-point
Mortgage applications	191,293	142,019	102,918	85,182	91,341	+7.2%	-52.3%
Mortgage volume (in billions)	€39.66	€45.60	€38.05	€30.81	€23.63	-23.3%	-40.4%
# of originated mortgages	117,692	135,997	113,680	94,482	73,178	-22.5%	-37.8%
House price index	182.4	187.5	188.6	184.1	181.2	-1.6%	-0.7%
Average purchase price	€426,787	€429,010	€443,042	€415,546	€416,786	+0.3%	-2.3%
Transactions	43,923	47,382	50,453	51,345	40,437	-21.2%	-7.9%
ECB refinancing rate	0.00%	0.50%	1.25%	2.00%	3.00%	+1.0%-point	+3.0%-point
10-year Dutch Government bond rate	0.83%	1.74%	2.44%	2.82%	2.71%	-0.11%-point	+1.88%-point
10-year German Government bond rate	0.55%	1.37%	2.12%	2.57%	2.30%	-0.27%-point	+1.75%-point
10 years mortgage interest rate	2.21%	3.76%	4.49%	4.56%	4.27%	+0.07%-point	+2.06%-point
20 years mortgage interest rate	2.57%	4.12%	4.54%	4.58%	4.37%	+0.04%-point	+1.80%-point
30 years mortgage interest rate	2.66%	4.25%	4.53%	4.66%	4.43%	+0.13%-point	+1.77%-point
10 years mortgage spread	104	168	147	139	130	-9 bps	+26 bps
20 years mortgage spread	140	198	161	154	151	-3 bps	+11 bps
30 years mortgage spread	157	219	171	173	165	+8 bps	+8 bps

Indicator definitions

Indicator	Source	Definition
Unemployment	CBS	The number of people who are between 15 and 75 years old who are not in work but are actively searching for paid work and are directly available to work
Housing market confidence	VEH	Indicator for confidence in the Dutch owner-occupied housing market/willingness to buy a house
Consumer confidence	CBS	Percentage points of the total answers to the questions on the economic situation, the financial situation and whether now is the right time to make large purchases
GDP	CBS	The size of an economy by taking the sum of final uses of goods and services (final consumption/gross capital formation) plus exports and minus imports
House prices	CBS /Kadaster	All sales transactions recorded by Kadaster as well as the municipal valuation of all homes in the Netherlands
Housing shortage	ABF research	The difference between the housing requirement that is not met (demand side) and the available supply
Market share	Kadaster	The market shares of different lenders are determined, based on mortgage registrations provided by Kadaster
Transactions	Kadaster	Number of home sales registered by the Kadaster and conducted by a notary
Market tightness indicator	NVM	An approximation by the NVM of the number of options that a potential buyer has in the housing market. The NVM covers approximately 75% of the market
Mortgage volume	Kadaster	The total annual mortgage turnover together with the total number of mortgages provided annually
Market share	Kadaster	The market shares of different lenders are determined, based on mortgage registrations provided by Kadaster
Newly built properties	CBS	# of new constructions added to the existing stock, from the Key Register of Addresses and Buildings
granted permits	CBS	# of granted building permits (building environment permits with activity) as documented in the Housing Act
Affordability	Calcasa	The percentage of the net monthly income spent on net housing costs
Mortgage spreads	DMFCO	The difference between the mortgage interest rate and the interest rate on a 10-year swap
Spread credit benchmark	Bloomberg	This is the option-adjusted spread between the Bloomberg Barclays investment-grade global credit benchmark and the risk-free rate of return. The OAS considers how the embedded option in the benchmark is likely to change the expected future cash flows and the present value of the security.
Spread German 10yr Bonds	Bloomberg	Spread between the yield on a 10-year German government bond and the risk-free rate of return.

1. Belgium and France grew by 0.4% and 0.2% respectively, while the economy of Germany stabilized.

2. Data of April 2023 shows an increase in inflation to 5.2% YoY in the Netherlands.

3. The indicators have a range between 0 (negative) and 200 (positive). A value of 100 is neutral.

4. The AWVN wage figure shows what employees covered by the relevant collective agreements can expect in terms of wage increases over the next 12 months. The periodic CBS collective agreement figures look back at the implementation of the collective agreements.

5. The policy states that, among other things, only maximum rents will apply within a certain segment. In addition, rental income will be taxed differently (more heavily) as of 2024.

6. Data of April 2023 shows a decrease in house prices of 4.4% YoY in the Netherlands.

7. The NVM registers a transaction on average 2 to 3 months earlier due to a difference in the transaction's time of registration.

8. Dutch mortgage guarantee scheme which applies to mortgages up to a certain amount (EUR 405,000 in 2023) and mainly supports low- and mid-income households.

9. Data is based on the ported mortgage and does not include the often included mortgage increase.

10. Annualised probability of default.

11. The expected annualised loss is the sum of the values of all possible losses, each multiplied by the probability of that loss occurring over a lifetime horizon (a duration of 7 years is taken into account).

12. As of May 10th, the ECB increased their refinancing rate with 0.25% to 3.25%.