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Thursday, 2 October 2014

Is the Dutch housing market finally back on track again? Or is it only pushed by the suicidal interest rates, coming from the ECB, and the extremely discomforting rent increases?! And why should you care?!

People, who have looked at the Dutch housing market from a distance, would currently have all the reasons to establish new trust in it. This had already been predicted by genuine insiders of the Dutch residential real estate market (RRE), like Amvest’s CEO Wienke Bodewes:

Bodewes: “It figures: in average the Dutch housing prices have dropped by no less than 20% - 30% during the crisis years and the interest is almost at an all-time low.

Although the maximum obtainable mortgage amount has definitely decreased under pressure of the Dutch banks and the new regulation of the AFM, the current reduced sales prices and historically low interest rates offer you so much ‘bang for your buck’ that it is worth your while to not wait any longer, with buying your dream house.

Besides that, it almost costs you money to save it at the bank, with the current minimal interest rates on savings' accounts. Especially when you have saved money during the crisis years, which you now use for partially buying your new house, you can get a very good deal at this moment.

His vision, which we discussed about one-and-a-half months ago, has in the meantime been confirmed by the data from the Dutch Central Bureau of Statistics of September, 22:

Prices of owner-occupied homes, excluding new constructions, were on average 1.7% higher in August 2014 than in August 2013. This was the fifth month in a row with increasing year-on-year prices.

The price index of owner-occupied houses, excluding new constructions, reflects price changes of residential property in the Netherlands.

The average price level of owner-occupied houses, excluding new constructions, is at approximately the same level as in May 2003. Prices were 19% below the record level registered in August 2008, but prices were 3.1% higher than in June 2013.

Last Wednesday, the Land Registry Office reported that 12,328 homes were sold in August, an increase of almost 24% relative to August 2013. In the first eight months of this year, 89,248 homes were sold, an increase by more than almost 38% relative to the same period last year.

And now, affairs seem to accelerate even more, under influence of the further reduced interest rates of the European Central Bank.

The following snippets came from Het Financieele Dagblad:

The Dutch housing market is gaining momentum so quickly that the number of mortgages with National Mortgage Guarantee (i.e. NHG) rapidly increased in Q3.

Earlier, analysts had anticipated a small decrease in the number of guarantees, due to the fact that the maximum threshold for the issuance of mortgages, with a guarantee against sales losses, had been reduced to €265,000 from €290,000.

In Q3, more than 30,000 mortgages have been issued with an NHG guarantee, in spite of this reduction of the threshold. That is an increase of 23%, in comparison with the same quarter last year, and a 14% increase, quarter-on-quarter. At the moment, buyers can borrow mortgage money against the lowest interest rates ever.

In the reactions to this article, a grumpy reader complained that the government helped to keep the Dutch housing prices at elevated levels, by:
  • A. granting parents to hand out a maximum gift of €100,000 to their children, in order to reduce their outstanding mortgage amount;
  • B. making it much easier for people to refinance the residual debt, coming out of their sold house, while taking a mortgage on their new house.

Writer Prisco Battes of the aforementioned article countered that the lowered outstanding mortgage, which had been reduced by €100,000 due to this parental gift, decreased the annual government subsidy on such a house, coming from the Mortgage Interest Deductability. He had definitely a point there.

Nevertheless, I still don’t approve of the idea that the Dutch government has thrown in another round of artificial catalysts to keep the housing prices up and enforce a turn-around in the Dutch housing market.

All in all, past government interference has created more havoc in the Dutch housing market, than that it did any good to it. Everybody, who became a victim of the Dutch housing bubble in 2008, will confirm that to you.

The real snags regarding this article, however, are the red and bold sentence and the extraordinary increase of rental rates in social housing and low/medium budget rental houses.

Due to the suicidal interest rates, which are set by the European Central Bank, the interest rates on mortgages have dropped to around 3% for a ten year fixed, annuity mortgage with NHG on it (see the following chart).

Interest rates on a ten year fixed, annuity mortgage
loan from various suppliers

Table courtesy of
Click to enlarge
When the Mortgage Interest Deductability (MID) is taken into the equasion, the nett interest rate drops roughly to 1.6% for a €265,000 mortgage with NHG. 
It goes without saying, that this is an almost ridiculous interest rate, which puts the doors for overcrediting wide open, in theory. 

Fortunately, there is currently the AFM (Authority Financial Markets) regulation, which prevents people from being overcredited: the new maximum mortgage amount, that may be offered by the money supplier, is ‘only’ 105% of the purchase price of the house, instead of the 120+% that was common practice in earlier years.

Nevertheless, the current extremely low rates could cause people a nasty surprise, when the fixation period has ended and the mortgage needs to be rolled over at a much higher interest rate.

This is not totally out of the question: until 1995, the median base rate for mortgages was 7%. People have to remember that we are in a time of exceptionally low rates currently.

Even when the interest rate on mortgages would rise to just 6% in 2024 for a €265,000 mortgage with NHG from 2014 and a ten-year fixed rate (not implausible at all), this would mean that the monthly mortgage payments would increase from €924 to about €1098, in spite of the amortization that took place(!).

These figures are based on a nett interest calculation rate of 3.4% annually (6% -/- MID). I take into the equasion that the MID as a subsidy will be partially reduced by the government in the following 30 years. 

While €170 extra per month does not sound spectacular, €2040 per year in extra payments does. Besides that, you have to remember that this is the cheapest kind of mortgage. The effects with all other mortgages will be (much) greater.

The second snag with respect to the aforementioned article, however, is of a very different kind.

Due to the disproportionate rent increases for social housing and low/medium budget rental houses, people are almost forced “at gunpoint” to buy their own home, even when they hardly can afford it.

These are the people, who earn too much money to get a rental allowance from the government, but still earn too little money to pay the full rent amount for their low / medium budget rental house: the income category of about €27,000+ in annual wages. For them the enormous rent increases are nothing less than a disaster.

This is made perfectly clear by a somewhat older article from the Central Bureau of Statistics, published on 5 September 2014:

In July 2014, the average rent increase of residential property was 4.4%, versus 4.7% in July 2013. On average, rents have been raised by more than 9% since the introduction of the income-related rent policy on 1 July 2013.

According to the Central Bureau of Statistics, high-income tenants living in dwellings intended to provide affordable housing for low-income households faced the most substantial rent increase.

For the second consecutive year, the maximum rent increase in 2014 was based on the inflation rate in the preceding year, a fixed surcharge plus an income-related component.

This year, the maximum rent increase varied from 4.0% for tenants in the lowest income brackets to 6.5% for tenants in the highest income brackets. The average rent increase over the past two years amounted to 9.2%. The inflation rate over the same period was 4.0%.

Four in every five tenant-occupied dwellings are owned by organisations operating on a non-profit basis, like housing corporations. With 4.7%, the average rent increase as imposed by non-commercial, not liberalised, landlords was distinctly higher than the rent increase imposed by landlords operating on a commercial basis (3.8%). For tenants living in more expensive accommodations with liberalised rents to whom the income-related rent policy does not apply, rents were raised by 2.9%.

The maximum rent increase is more often imposed in the low-rent social housing sector than in the commercial housing sector; for 62% of low-income tenants, the rent increase was equal to the maximum rent increase of 4.0 percent. In the category mid-level incomes, more than half had to pay the maximum rent increase of 4.5 percent. In the highest income category, two-thirds had to pay the maximum rent increase of 6.5 percent.

Nearly 55 percent of tenants living in accommodations owned by commercial private landlords had to pay the maximum rent increase.

Occasionally, the rent increase exceeded the allowed maximum. That was mostly the case when new tenants moved in.

When we are talking about people in the highest income brackets (see red and bold text), we are definitely not talking about people who are earning much more than 1.5 times the Dutch, modal income of €34,500, in my humble opinion. And probably they earn a lot less, with only a few exceptions. These people were confronted with a 6% raise of the rent in 2014 alone.

For someone with only a modal income or less, a rent increase of 4% for this year, is a helluva lot of money, especially when it is for the second year in a row.

At gunpoint, I said?! Yes! At gunpoint!

But even when people enter the governmental ‘walhalla’ of an owner-occupied house, their misery is not automatically over yet. That is proven by the following snippets from De Telegraaf:

The number of forced house sales increased substantially in Q3 of this year: to 3587, which is an increase of 5% year on year. This is published  by the Guarantee Fund for Owner-Occupied Housing (i.e. WEW), which distributes the National Mortgage Guarantee (NHG).

The fund received 1336 loss declarations during the last quarter, 16% more than during the same period last year. The WEW speaks of a “slight increase” during the first 9 months of this year. The losses remain “containable” and, for the time being, there is no need for financial backup by the government. 

The average amount that the Guarantee Fund had to pay on sales losses, decreased to €36,700 during Q3 from €40,000 in 2013Q3.

WEW reckons with a further increase of the number of forced house sales, due to the lagging effect of the crisis. This effect is caused by the circumstance that more houses have been bought with an NHG during the last few years. On top of that, it is expected that more houses will be sold, which are currently under water, when the housing market in The Netherlands further improves.

In spite of the fact that the reasons for this increase in the number of NHG claims can be ‘explained’, it still doesn’t sound like the crisis is over on the Dutch housing market and in the Dutch economy in general. 

To the contrary, it sounds more likely that we are firmly in the middle of this crisis. Which we actually are, in my humble opinion.

The fact that the Dutch housing market seems now again on its way to create a new (mini) bubble of rising housing prices and overcrediting (still!), is something that you should care about!

As I tried to explain, it is probably caused by:
  • the reckless interest rates for mortgages on one hand;
  • tenants-turning-involuntary-homeowners on the other hand.

Both these circumstances can have very nasty side-effects in the not-so-distant future, especially when the Dutch economy continues its very slow growth and the official interest rates will finally start to rise, within a number of years.

It is good to keep this in mind, when you read the happy-happy news about the Dutch housing market.

1 comment:

  1. Thanks for collecting this information (once again).
    A personal note : in my family two houses were sold in my family after 2+ years on sale