Group Economics
Housing Market Monitor
Philip Bokeloh 020 38 32 657
Madeline Buijs 020 38 38 201
Up but not yet running
21 March 2014
•
The Market Indicator of the Homeowners’ Association (VEH) is back at the 2008 level. The improved sentiment in the housing
market is reflected in a more positive development of sales and prices.
•
The Dutch mortgage market is attracting the interest of new entrants. The extra supply is making the mortgage market more
•
competitive and putting downward pressure on interest margins.
The stagnation of construction activity is impeding market dynamics. A decline in land prices is necessary for construction activity to
recover. Municipalities can contribute to this by taking a loss on their land positions.
Housing market on the mend
Confidence is gradually returning to the housing market. From
mid-2013, the transaction volume has picked up slightly and
price levels have edged higher. The further tightening of
mortgage lending conditions early this year did not stifle the
revival. Nevertheless, other more persistent constraints are
continuing to hamper the housing market. A large group of
homeowners face potential negative equity. This is putting a
brake on property mobility. The construction volume has also
declined sharply. The modest number of new-build permits
suggests that construction activity is likely to remain weak for
some time to come. Construction activity can only start to
recover when landowners write down their land positions, so
that land prices can fall. This will take time, however. Further
hurdles are in the offing. Higher taxes on home ownership
cannot be ruled out. The imputed rental income tax rate was
already increased early this year, while municipal property tax
rates have also been raised. The housing market may be up,
but it is not yet running.
the market is the abundance of properties up for sale. The
shortage indicator of the Dutch Association of Real Estate
Brokers (NVM) suggests that buyers are spoilt for choice. And
a final crucial factor is the introduction of income-dependent
rent increases. Tenants of social rented housing on high
incomes have been confronted with substantial rent increases,
giving them an incentive to buy their own home.
Sentiment back at pre-crisis level
VEH Market Indicator (index)
110
100
90
80
70
60
50
40
04
Sentiment back at pre-crisis level
The VEH sentiment indicator has improved significantly. Since
hitting a low at 51 points in December 2012, the indicator has
steadily recovered, rising to 86 points in February, the same
level as in May 2008 on the eve of the financial crisis. This is
not to say that the mood is euphoric. The confidence indicator
is still well below the record score of 99 reached in July 2005.
The upturn in sentiment is based on the less negative
assessment of the economic situation. Since the second
quarter of 2013, the economy is no longer in recession. In the
final quarter of 2013, and the Netherlands was even among
the eurozone’s fastest growers in the fourth quarter, with yearon-year growth of 0.7%, though this figure was distorted by a
temporary spike in car sales. Furthermore, the equity indices
have been on an upward trajectory since late last year, which
is adding to the financial optimism. Respondents are also less
negative about the expected development of house prices.
After shedding 20%, the housing market has already suffered
a sharp retreat. Moreover, with average mortgage interest
rates now 2%-points lower, properties have become more
affordable. Another factor luring prospective buyers back into
05
06
07
08
09
10
11
12
13
14
Source: Homeowners’ Association
Transaction volume and prices continue to rise
The brightening picture in the housing market is also evident
from the transaction volume. According to Statistics
Netherlands (CBS), the transaction volume has been on the
rise since mid-last year. The total number of transactions in the
twelve months until the end of February 2014 was 115,000, up
12,000 on the twelve-month period until the end of June 2013,
but still a long way off the annual average of 192,000 during
the 1995-2008 period. Due to the extra sales, the number of
properties on the market dropped to 208,000 in January,
22,000 less than in June. This decrease, however, cannot be
purely ascribed to the higher number of transactions. Another
factor is that would-be sellers who do not succeed in realising
the asking price are taking their properties off the market. Due
to the withdrawal of overpriced properties, the difference
between the average asking price and the average transaction
price has narrowed from 32% in June 2013 to 29% in January.
2
Housing Market Monitor - 21 March 2014
A cautious improvement is also visible in transaction prices.
Though the price index for existing houses fell by 1.7% yoy in
February, it is 1.5% higher compared to June 2013. However,
there are marked differences between the different types of
housing. Whereas the prices of upper-segment properties,
such as detached and semi-detached housing, have continued
to fall since June, prices of more affordable terraced housing
have gone up. Oddly, the reverse applies at provincial level. In
the provinces where most transactions take place (ZuidHolland, Noord-Holland, Noord-Brabant, Gelderland and
Utrecht, jointly accounting for over 70% of the market), prices
have dropped further since June, whereas other provinces
have seen prices recover.
Strong regional variations
Price fall since Q3 2008
Zeeland
Flevoland
Overijssel
Zuid-Holland
Drenthe
Limburg
Groningen
Nederland
Friesland
Utrecht
Noord-Holland
Gelderland
Noord-Brabant
These relatively limited payment arrears are tempting new
entrants into the Dutch mortgage market. The recent surge in
mortgage applications is a further enticement. The Mortgage
Data Network (HDN) reported 28,000 mortgage applications
for the months of January and February, a jump of 40%
compared to last year. Adding to the attractions of the
mortgage market is the fact that new loans are subject to
mandatory repayments and have a lower risk profile.
Moreover, the threshold to entering the market is also relatively
low. Many mortgages are sold through intermediaries. Several
years ago insurers started to actively expand their mortgage
portfolio, and foreign parties and pension funds have recently
followed suit. The extra supply makes the market more
competitive, with downward pressure on interest rate margins.
That is good for buyers and ultimately also for the housing
market.
Changing mortgage preferences
Regulations are having a strong impact on the type of
mortgage applications. Last year, annuity loans underwent
robust growth and now account for about 70% of the
applications. This new preference for annuity loans stems from
the fact that since 1 January 2013 repayments are mandatory
to qualify for mortgage interest relief. Applications for nonannuity loans now exclusively concern the refinancing of ‘old’
loans.
10
15
20
25
Source: CBS/Land Registry
Number of auctions and payment arrears remains limited
Fewer auctions are being held. According to the Land Registry,
over 1,800 homes were auctioned in the twelve months to
January 2014 inclusive, as opposed to just under 2,600 in the
twelve months to January 2013 inclusive. The decline stems
partly from the banks’ preference to give customers who are in
arrears on their mortgage payments an opportunity to sell their
home in the normal market instead of by auction. This policy
has led to a slightly larger number of homeowners in arrears.
Fortunately, the number of people in arrears has remained
modest. According to the latest figures of the Central Credit
Registration Office (BKR), 92,000 households were struggling
to pay their mortgage costs in October, a relatively small figure
given that there are 3.5 million mortgagees in total. The BKR
reported that the number of people in arrears, though still
rising, was flattening out. New BKR figures to be published in
April are expected to confirm the flattening trend. This
conclusion can be drawn from the more recent data of the
Fitch rating agency, which keeps track of the arrears on the
underlying loans of securitisation programmes. Fitch, too,
notes a deceleration in the rise in the number of payment
arrears. According to Fitch, the number of loans in arrears by
more than three months was 0.82% in January, one of the
lowest arrears rates in Europe.
The share of loans with a National Mortgage Guarantee (NHG)
also moves in line with policy changes. After the NHG ceiling
was significantly raised in 2008, applications for NHG loans
shot up. Now that the NHG limit is being gradually lowered, the
NHG share is steadily diminishing. After accounting for no less
than 90% at the end of last year, the share of NHG mortgage
applications has dwindled to 60% of the total.
Another reason for the waning interest in NHG loans is the
stricter conditions that NHG sets when assessing claims under
the scheme. Since 1 January the Homeownership Guarantee
Fund (WEW) is less inclined to classify a mortgage as
unaffordable and therefore accepts fewer claims. One reason
why monthly expenses are less likely to be classified as
unaffordable is that the assessment of the ability to pay no
longer automatically assumes that the homeowner makes
annuity repayments. The assumption of repayments is correct
for new mortgages, but rarely applies to mortgages predating
2013, so that the actual monthly expenses for the latter are
much lower. Also, under the new criteria, the WEW takes
account of the total household income. In the case of double
income households, therefore, both incomes are included in
the ability-to-pay test.
More stringent credit conditions
The share of NHG mortgages will contract further from July,
after the NHG limit is brought down from EUR 290,000 to
EUR 265,000. And this is not the last reduction. As NHG
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Housing Market Monitor - 21 March 2014
mortgages qualify for a lower interest rate than non-NHG
mortgages, the step-by-step lowering of the NHG limit puts a
further constraint on people’s ability to buy a house.
Besides the downward adjustment of the NHG limit, would-be
buyers are also required to meet stricter credit conditions.
According to the criteria of the National Institute for Family
Finance Information (Nibud), households can once again
borrow less on the basis of their income. The future
development of the Nibud criteria is closely related to the
disposable income. After years of decline, due to e.g. rising
unemployment and higher health and pension costs,
disposable incomes are poised to rise again in the coming
years. The risk of a further reduction of the Nibud standards is
therefore limited. Against this, the collateral conditions for
credit are likely to undergo further tightening. Loans are now
limited to 104% of the collateral value versus 105% last year.
Further reductions are already planned. The continuing
tightening of the credit conditions is inhibiting mortgage volume
growth.
Slight decline in volume of outstanding mortgages
EUR bn
700
625
550
475
400
06
07
08
09
10
11
12
13
Source: DNB
According to DNB data, outstanding mortgages at the end of
the third quarter had a total value of EUR 644bn, EUR 7bn less
than the same quarter a year earlier. One reason for this is the
increased volume of repayments. People are being
encouraged to make early repayments by means of a
substantially more generous tax-free gift allowance and the
possibility to withdraw cash locked up in life cycle schemes
without attracting tax. Another reason for making additional
repayments is the historically low interest rates on savings.
Ultimately, however, the decrease in the mortgage volume is
due to the decline in the number of transactions and the lower
price level rather than the acceleration of repayments. In 2013,
the total value of new mortgage loans was EUR 53bn,
EUR 20bn less than in 2008.
Continuing constraints on growth in transaction volume
As soon as the transaction rate picks up, the mortgage volume
will probably start rising again. With less uncertainty hanging
over the housing market, would-be buyers will be more
confident to buy. After years of postponing their home
purchase, a substantial group is now eager to take the plunge.
This pent-up demand will give an extra boost to the growing
transaction rate.
One factor that may impede the transaction rate from returning
to its pre-crisis level is the substantial group of homeowners
with an ‘under water’ mortgage. According to the CBS, 1.4
million households, or 34% of homeowners, face negative
home equity. In 2008, the figure was a mere 13%. The more
generous tax-free gift allowance and the ability to deduct
interest paid on a residual debt from a sold property offer some
relief. Further relief could come from the proposal to use the
employee’s pension contribution for debt repayments instead
of pension accrual. However, there are drawbacks to this plan
and it may never get off the ground. Despite all these
measures, negative home equity will continue to thwart
mobility in the property market in the coming years. Apart from
the fact that many people are reluctant to accept a loss, wouldbe sellers will also find it hard to convince their lender that they
can afford to buy a new property and simultaneously cope with
the residual debt from their old home.
Alongside the negative home equity problem, the stagnation of
construction activity will also keep the transaction volume in
check for the time being. Last year, at most 15,000 new-build
homes were sold, less than half the number in 2008. It will take
some time for the transaction volume to return to its old level.
Last year the number of new-build permits dropped to 26,000
as opposed to 87,000 in 2008. Admittedly, this decline is partly
attributable to the landlord levy. Due to the extra tax that
landlords are required to pay in compensation for their extra
rental income from the rent increases, housing associations
are much less keen to build rented housing. But the market for
new-build homes in the owner-occupied segment is also weak.
One major problem for the construction of homes is the low
margins for builders. Since the crisis, the average selling price
of new-build homes has decreased by over 15% to
EUR 250,000. Builders were only partly able to absorb this
price fall through savings on costs of materials and labour.
However, the acquisition costs of land, which is one of the
main cost items, have barely fallen. Last year, the average
cost price of construction land was still EUR 371 per square
metre, only EUR 6 less than the average pre-crisis price.
Construction activity can only recover if land prices fall. And a
fall in land prices is only possible if the owners of construction
land are willing to take a loss. Builders and housing
associations have already done their bit in this respect. Since
2009, housing associations have already written down
EUR 900 million. Municipalities, however, must make an even
greater sacrifice. According to the Deloitte audit firm,
municipalities have already written down over EUR 3bn on
4
Housing Market Monitor - 21 March 2014
their land positions in the period from 2008 to 2012 inclusive.
Deloitte expects that the depreciation will ultimately run up to
EUR 4bn to 6bn. Others put the required write-down at some
EUR 7bn. Such an adjustment would reportedly make it
possible to offer construction land at half the price charged in
2008. This would make a big difference because, according to
the RIGO research agency, the price of land makes up about
30% of the purchase sum of new-build houses.
Price of construction land still above pre-crisis level
Average land price per square metre in euros (12-month average)
425
rental income tax rate. This tax is based on the fictitious
income from the property if rented out. In line with the recent
rent increases, the imputed rental income tax rate was raised
at the start of this year from 0.6% to 0.7% for homes between
EUR 75,000 and EUR 1m. A further increase in the rents and a
corresponding rise in the imputed rental income tax rate
cannot be ruled out, now that policy-makers are seeking to
exercise more neutrality between the owner-occupied and
rented segments. In the more distant future, the imputed rental
income tax rate could come under more upward pressure if the
government decides to treat owner-occupied property in the
same way as other assets. The effective wealth tax rate is
1.2%. Economists have been discussing this proposal for
some time now, but there is little political support for the idea.
400
375
350
325
08
09
10
11
12
13
14
Source: Land Registry
After the local elections in March 2014, municipalities may be
more willing to write down their land positions. Once the new
municipal councils have been installed, the time will be ripe to
set their house in order and take the loss. Financially speaking,
there is some room for manoeuvre. Though the provisions and
reserves registered for land development and sale are not
sufficient in themselves to cover the loss, the overall municipal
reserves can be used to fill the gap. In addition, some
provinces are prepared to lend a helping hand to the
municipalities within their borders. Overijssel, for instance, has
indicated that the proceeds from the privatisation of energy
stations are to be used to take over land to the tune of
EUR 130m, but only on condition that the municipalities
compensate part of the loss and do not abuse this assistance
as a licence for municipal mismanagement.
Limited scope for price increases
Efforts to tackle the problem of negative home equity and
lower land prices will strengthen the housing market dynamics.
Presumably, this will be primarily visible in an accelerating
transaction rate. Price rises are expected to remain limited.
Since the crisis, policy-makers are extremely wary of creditdriven price increases. They will be quick to clamp down on
any excessive growth in lending, using macroprudential policy
instruments such as restrictions on the maximum loan-toincome and loan-to-value ratios for mortgages.
A further constraint on price increases will be imposed by
higher taxation on property. One warning of this has already
been given in the form of the recent increase in the imputed
The municipal property tax rate is also going up. Various
municipalities have raised the municipal tax rate to prevent the
income from this vital source of revenue from falling as a result
of the decline in house prices. This threatening erosion of their
revenue comes at a bad time for the municipalities. More and
more responsibilities are being shifted from central government
to municipal level, while the municipalities remain dependent
on central government for their revenue. Municipalities must
adhere to central government’s revenue-raising rules.
However, if the decentralisation of tasks continues, it is
reasonable to assume that these restrictions will be relaxed.
This, at least, is what the OECD (Organisation for Economic
Cooperation and Development) recommends. This Parisbased think tank recently asserted that local government
authorities can operate more efficiently if they are given more
freedom to set their own tax rates. But that is still a long way
off. This proposal, too, enjoys greater support among
economists than among politicians. Nevertheless, in view of
the growing autonomy of the municipalities, an increase in the
municipal property tax rate cannot be ruled out.
Conclusion
The housing market has made major steps forwards. After
years of malaise, confidence is back at the pre-crisis level. The
number of transactions and prices are slowly rising. Though a
substantial group of homeowners face potential negative home
equity, payment arrears remain relatively low. Given the
shrinking uncertainty, new lenders are entering the mortgage
market. This extra supply is keeping interest rate margins low.
Pent-up demand will give the transaction volume an extra
impulse this year. However, more stringent credit conditions
are keeping the transaction volume in check. In addition, the
dynamics are being inhibited by the lack of construction
activity. More stringent credit conditions and tax increases are
also imposing constraints on the price development.
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Housing Market Monitor - 21 March 2014
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