Fragile recovery in Dutch housing market

September 30, 2009

Despite encouraging signs of higher house prices and sales in Q2 2009, uncertainty remains in housing market in the Netherlands.

The median house price in the Netherlands was €225,000 in Q2 2009, up 2.7% from the previous quarter. With deflation, house prices rose by 6.2% over the same period, according to the Dutch Association of Real Estate Agents or NVM.    

Housing transactions rose 26% to 32,000 in Q2 2009 from the previous quarter, according to data from Kadaster, or the Dutch Land Registry Office. Some experts suggest that lower interest rates combined with the increase in coverage from €265,000 to €350,000 by the National Mortgage Guarantee Scheme may have stabilised the market.

However, these encouraging signs may just be due to seasonal variations. Compared to a year earlier, the median house price was still down 10.5% in Q2 2009. Total housing sales during the first half of 2009 was 57,487, lower by 32.3% compared to the same period in 2008.

The house price index for existing owner-occupied also showed no signs of recovery. In July 2009, the national index was down 4.3% (4.5% in real terms) from its level a year ago. It was the biggest price fall since the index was started in 1995. The index for detached houses showed a bigger y-o-y price fall compared to apartments (4.9% vs. 3.9%), according to the Central Bureau of Statistics (CBS).

The depressed housing market comes on the heels of a house price boom which lasted from 1992 to 2007. At the peak of the boom, prices rose by an average of 11% (8.4% in real terms) annually from 1996-2001.

The weak economy is expected to drag the housing market down. After economic growth slowed down to 2% in 2008 from 3.3% in 2006 and 2007, GDP is expected to contract by 4.8% in 2009. In Q2, the economy contracted by 5.4% y-o-y, the worst quarterly performance since World War II.  

NVM expects median house prices to fall by 3.5% in 2009 while Rabobank, one of the largest financial institutions in the Netherlands and the world, predicted house prices to fall by as much as 6%. They also anticipate housing sales transactions to fall to 135,000 in 2009; sharply down from 182,000 in 2008 and 202,000 in 2007.

Political and economic crises

The Netherlands saw dramatic house prices increase from 1996 to 2001pushed by rapid economic growth.  During this period the economy grew 3.7%  annually, and real private sector wages rose by 3.6% annually; while inflation was only 2.7%, leading to a significant increases in purchasing power.

According to NVM figures, median house prices in the Netherlands rose by about 80% (59% in real terms) from Q1 1996  to Q2 2001. Amsterdam, the capital, experienced stronger house price growth of 111% (86% in real terms) over the same period.


CHANGES IN AVERAGE HOUSE PRICES (%)

ECONOMIC BOOM
(Q1 96 – Q2 01)
POLITICAL INSTABILITY, ECON. DOWNTURN
(Q3 01 – Q1 03)
ECONOMIC RECOVERY
(Q2 03 – Q2 06)
POLITICAL CRISIS
(Q3 06 – Q1 07)
GLOBAL FINANCIAL CRISIS
(Q2 08 – Q1 09)
GLOBAL FINANCIAL CRISIS
(Q1 09 – Q2 09)
Netherlands
80.8
2.4
13.9
-0.5
-12.7
2.74
Amsterdam
111.4
-1.5
9.8
-2.8
-15.3
6.44
The Hague
76.0
-2.0
17.5
-0.6
-16.0
6.77
Rotterdam
79.1
0.3
9.8
-2.2
-11.3
2.21
Utrecht
69.3
0.9
14.9
4.4
-11.6
2.17
Source: NVM

From 2001 to 2003, annual GDP growth slowed to an average of  0.8%.  Political instability contributed to the recession. In 2002, two governments fell (the Wim Kok government in April 2002, and the first Balkenende government in October 2002). Then the leader of the right-wing populist party (LPF), Pim Fortuyn, was killed, days before the May 2002 parliamentary election.

From Q3 2001 to Q1 2003, median house price growth slowed to a crawl, while prices in Amsterdam and The Hague dropped. When adjusted for inflation, house price falls nationally and in major cities ranged from 2% to 6%.   

The political and economic situation stabilised in 2003 with the Dutch economy eventually recovering. GDP grew by an average of 2.6% annually from 2004 to 2006. By Q2 2006, house prices in Netherlands were 14% (9% in real terms) up on three years earlier, with strong increases in The Hague (17.5% nominal and 12.5% in real terms) and in Utrecht (15% nominal and 10% real).

Fall and recovery

Another political crisis slowed the market from Q3 2006 to Q1 2007. The housing market recovered slightly (with the economy growing by 3.45% in 2006 and 2007) but the global financial meltdown pushed prices down in 2008.

From Q2 2008 to Q1 2009, national median price dropped by 13% (14% in real terms). Amsterdam and the Hague were affected more severely with house price falls of 15% and 16%, respectively. House prices in Rotterdam and Utrecht dropped by around 11% over the same period. 

In Q2 2009, property prices nationally and in major cities increased compared to the previous quarter. The median house price in The Hague was  €205,000 up by 6.8% (10.4% in real terms) q-o-q. Prices remain the highest in Amsterdam at €248,000, an increase of 6.4% (10% real) from the previous quarter. In Utrecht, the median price was €235,000 while it was €185,000 in Rotterdam, both up by 2.2% (5.65% in real) from the previous quarter . 

Subsidized mortgage market

The Netherlands is geographically low-lying area with about 27% of the area and 60% of the population living below sea-level. With this, the government had a highly interventionist role in the housing market. It’s role is most visible in terms of reclamation and land development, home ownership and mortgage subsidies, and a huge social rental sector.

Since the 1980s, the government has aggressively promoted homeownership by offering generous mortgage subsidies. The Dutch mortgage market has expanded rapidly over the past decade, with residential mortgage debt rising to almost 100% of GDP in 2008, up from 60% of GDP in 1998. Owner-occupancy is around 55% of the occupied stock (2005 figure), up from 42% in 1980.

The Dutch fiscal regime allows full tax deductibility of most mortgage interest payments at the marginal tax rate. Mortgage market liberalization has also brought much new competition, and since 1995, 90% of new mortgages have been of a type that is not repaid until the loan maturity, while 30% do not have to be repaid at all (“interest-only”).  

The proportion of mortgages with LTV ratios of more than 100% increased from 15% in 1990, to more than 70% by 2001-02. In 2006, the average LTV on new first-time buyer loan was an astonishing 144%. In 2007, the Code of Conduct for Mortgage Lenders was tightened to reduce the risk exposure of Dutch lending institutions.

The government had also implemented policies to discourage excessive mortgage growth in the past:

  • In 2001 tax deductibility for mortgages used for non-housing consumption or investments and second-home purchases was removed.
  • In 2002, interest deductibility was limited to 30 years.
  • From January 2004, homeowners moving to more expensive homes have had to use their capital gains on their former house for down payment.

Nevertheless, mortgage growth continued in 2008, rising by 5% to reach €589 billion (higher compared to the 2% growth in 2007). In Q1 2009, outstanding residential mortgage rose to €591.6 billion, up 5.6% from a year earlier.

Interest rate reductions

The great Dutch house-price boom has been encouraged by a reduction in mortgage interest rates from an average of 9.58% (1990 to 1992), to 4.7% in May 1999. Mortgage interest rates then hovered between 5% to 7% between 2000 and 2002.

Interest rates for mortgages are generally based on key rates set by the European Central bank (ECB).  Mortgage interest rates dropped from 4.5% in 2003 to 4.18% in 2004 and 3.16% in 2005, before moving up to 4.37% in 2006.

With rising inflation due to higher global fuel and food prices, the ECB tightened monetary condition leading to higher interest and mortgage rates in 2007 and mid 2008. The average mortgage rate rose to 5.22% in end-2007. In October 2008, the average mortgage rate peaked at 5.61%. The global financial crisis exploded in Q3 2008. To ease the credit crunch and improve liquidity central banks including the ECB reduced key rates leading to a gradual decline in mortgage rates.

Although the average mortgage rate in Netherlands moved down to around 4.8% in July 2009, the spread from the key rate widened to more than 3 percentage points. From June to October 2008, the spread between the two was less than 0.2 percentage points.

Fixed loans

Most Dutch housing loans are fixed rate mortgages (FRM), i.e. fixed interest rates for 5 years or more. However, households adjusts the interest-rate fixation (IRF) of new loans depending upon the movement of interest rates.

However when mortgage rates were falling in 2004 and 2005, more households took adjustable rate mortgages (ARM). By end-2004, 40% of new loans approved were either ARMs or had interest rates fixed for less than a year. On the other hand, the share of new loans with IRF of 10 years was down to 4%.

When interest rates rapidly rose in 2007, households shifted to mortgages with longer IRF. In Q2 2007, 43% of new loans have 10 year IRF while the share of loans with IRF of less than 5 years dropped to 25%.

In Q4 2008, after the worst of the financial meltdown was seen, 51% of new loans have an IRF of 5 – 10 years, 18% have IRF of more than10 years, 15% with 1 – 5years IRF and 12% with IRF of less than one year.
With interest rates falling and/or expected to remain low, 27% of new loans approved in Q2 2009 have IRF of less than a year, while 32% have IRF between 1 and 5 years. The share of loans with IRF of more than ten years dropped to 9%.

The drop in the number of new loans approved was remarkable. The total amount of mortgages approved in Q2 2009 was only €13.6 billion. Although it was up from €12 billion in Q1 2009, it was still a far cry from the €20 billion approved in Q2 2008 or the €30.9 billion approved in Q4 2005.

Social housing and the rental market

Traditionally, Holland has had a large social rental housing sector, and in the 1950s, owner occupants accounted for only 29% of the housing stock.  More recently the government has been promoting home ownership, with remarkable results. Owner-occupancy rose to 42% by 1980, then to 55% by 2005.

Homeowners receive favorable tax treatment. Aside from full income tax deductibility of mortgage interest payments;, capital gains from rising house prices are also not taxed. However, this is partly offset by an annual imputed rental income tax, based on the property’s assessed value.

The government provides home-ownership grants to low-income households. Many renters also receive direct government subsidies to keep their rent-to-income ratio within certain limits.

In 2001, total government subsidies for the owner-occupied sector amounted to around €8 billion, with a similar amount provided for the rental sector. The system is highly inefficient in terms of social objectives. It also reduces mobility both for owner-occupiers and renters.

Around 43% of the total housing stock in 2006 was rented housing; 80% of which was social housing. A huge proportion of rented accommodation is owned and managed by housing corporations.

About 95% of the rental stock falls under a special regulatory framework (see Landlord and Tenant section). A landlord may impose rent increase once a year, but the government sets the maximum rental rate increases.

Rent controls

From 2001 to 2004, actual rent increases were based on the average inflation rate during the preceding five years. In July 2005, annual rent hikes were then based on last year’s inflation rate plus a fixed surcharge. However, the fixed surcharge was removed in 2007. The maximum rent increase allowed was set to a level equivalent to last year’s inflation rate.

The maximum allowable rent increase from July 1, 2008 to June 30, 2009 was 1.6%, equal to the inflation rate in 2007. New guidelines for rent increases are yet to be released but it should be around 2.2%, the inflation in 2008.

With the inflation-based allowable rent increase generally lagging behind price increases, rental yields or generally low in the Netherlands. Nevertheless, rental yields are relatively high in the small-up-market decontrolled sector, which consists of around 5% of all rental dwellings.

In July 2009, rental yields in Amsterdam ranged from 5.6% to 6%, according to Global Property Guide data. Smaller units of 70 square metres (sq. m.) generate the highest gross yields. In The Hague, gross rental yields are slightly higher at 5.5% to 6.6%.

Insufficient supply

Every year the number of single-person households in Holland increases, growing faster than the overall population, and faster than the rate at which dwellings are constructed. For instance, the number of one-person households increased from 1.1 million in 1908, to 2.5 million in 2007.

The extensive environmental regulations combined with the high costs of land development tend to choke the supply of new dwellings.  The housing supply has simply been insufficient. No less than 80,000 to 100,000 new houses are needed each year.

In 2007, the number of dwellings completed rose to 80,537 units, the since 1998. However, 18,633 dwellings were removed in 2007 leading to a net increase of only 61,560 dwellings .

The number of dwellings completed in 2008 dropped to 78,882, but with a smaller number of dwellings removed, the dwelling stock increased by 77,958. The insufficient supply of dwellings might add to the upward pressure on property prices.

Weak economy

With house price movements highly sensitive on economic (and political) developments, the continuing economic recession is expected to drag house prices. In 2008, the Netherlands was relatively better off compared to other developed countries with a GDP growth rate of 2%.

In Q2 2009, GDP contracted by 5.4% y-o-y, after a -4.5% change in Q1. Projections on the economy see a sharp fall in GDP for the entire 2009, with estimates ranging from 4.5% to 6%.  

The Dutch economy relies heavily on foreign trade (contributing around two-thirds of GDP), and the fall in net exports is the main cause of the recession.  The volume of exports of goods and services dropped 10.9% y-o-y to Q2 2009, while imports fell 10%.
For the entire 2009, the volume of exports and imports are anticipated to fall by 17.25% and 14%, respectively.

The unemployment rate is expected to rise to 6% in 2009 and 9.5% in 2010 from 4% in 2008. In a survey by Rabobank earlier this year, around 60% of the respondents said that they are not planning to move.  Uncertainty about employment and income was cited by 40% of those not planning to move as a major factor for their decision.

Future movements in the economy and labor market will dictate whether the fragile recovery of the housing market will continue or not.

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