Housing Market Monitor – Up but not yet running

by: Philip Bokeloh , Madeline Buijs

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  • 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.

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 year-on-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 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.


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.

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 (Zuid-Holland, 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.


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.

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 non-annuity loans now exclusively concern the refinancing of ‘old’ loans.

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 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.


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, would-be 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 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.


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 credit-driven 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-to-income 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 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.

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 Paris-based 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.


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.