In February and March of this year, the prices of existing owner-occupied homes rose by 2.1 and 0.1% respectively compared to the preceding month. But those growth figures were not sufficient to offset the decrease seen in January (-2.9%). Averaged across the first quarter, the prices of existing owner-occupied properties (PBK Price Index of Existing Houses) fell 2.3% overall compared to the previous quarter. The start of the second quarter of 2013 has been less promising: prices declined by 1.4% in April compared to March. This makes for a 19% decrease of residential properties prices since the start of 2008. Compared to the first quarter of 2012, slightly fewer residential properties were sold over the past quarter: 23,090 (2012: 23,951).
Bottom in sight
Looking at many long-term indicators, such as affordability and the total housing cost percentage, we see that residential property is relatively affordable for first-time buyers. In real terms, owner-occupied homes have been over 30% cheaper on average since the start of the crisis. Even if account is taken of changes in policy and mortgage lending rules, first-timers are able to buy more ‘home’ than they were prior to 2008. That they are not yet doing so is partly attributable to uncertainty about the economic situation, the very recent policy debates and the fact that house prices always tend to respond more extremely than is warranted on the basis of explanatory factors, such as income and interest rate trends. The long-term affordability and the stabilisation of transaction numbers suggest that the bottom is in sight. Nonetheless, an ailing economy and rising unemployment of course do not augur well for a recovery in the housing market.
Segments and regions
The crisis has not had the same impact on all housing market segments. Prices of expensive detached houses have experienced the steepest fall since the fourth quarter of 2008 (-22%) while those of mid-terraced houses were the most resilient by comparison (-16%). A regional analysis carried out by Rabobank economists also shows that large houses in municipalities with comparatively few green areas, comparatively many eyesores blighting the horizon have been hit particularly hard by the crisis in the housing market. Perhaps because of the decline in prices, the proportion of detached houses within aggregate house sales has gradually increased for several years, while that of apartments has been falling.
Consequences of new policies
The developments of the past quarter must be assessed against the background of new tax rules introduced with effect from 1 January 2013. These have resulted in significant changes in lending regulations in the housing market, with considerable effects on prices and on transaction numbers. To qualify for mortgage interest rate deduction, new mortgage loans or mortgage top-ups must be subject to full annuity redemption. As a consequence, households can borrow up to 9% less on the basis of the same mortgage payments as prior to 1 January of this year. In addition, Nibud (National Institute for Family Finance Information) has lowered the standard mortgage thresholds because a fall in purchasing power is assumed, bringing down the maximum mortgage by some 4%. This means that the potential negative price impact of market reforms and mortgage lending conditions could be as much as 13%. The market was accordingly expected to contract substantially in the first quarter of 2013. In effect, the number of sales only declined slightly compared to the fourth quarter of 2012 and in fact grew by 5% if the comparison is based on the two quarters overall. This indicates how transactions in 2012 already took account of the policy changes in advance, in pricing as well as other respects.
Debates on the housing market
Despite the cabinet’s call for calm in the housing market, the latter was the subject of extensive debates in the first few months of 2013. A new housing agreement was signed in February, further to a motion by the Christian Democrat party CDA in the Upper House of the Dutch Parliament. This requested the cabinet to examine the consequences of mortgages not being fully redeemed and to examine the options for spreading repayments across a longer period than the thirty years that are customary at present, for instance 35 years. In response, Minister Blok sent a worked-out example to the Upper House of a mortgage in which the mandatory annuity mortgage is combined with a second, interest-only mortgage of up to 50% of the value of the property. The interest on this second mortgage is not tax-deductible however. Households could opt for this mortgage as it offers lower monthly payments for a thirty-year period.
In its review published in April, the Lower House Commission on Housing Prices of the Dutch Parliament (Tweede-Kamercommissie Huizenprijzen) describes the situation in the owner-occupied housing market since 1995. The government stimulated home ownership across this entire period. The Commission states that products were launched in the 1990s that maximised the advantage of the mortgage interest rate deduction. The Rabobank economists point out that this was only one among several factors that pushed up house prices. Moreover an international comparison carried out by the Rabobank researchers shows that price increases were relatively limited in the Netherlands compared to other countries, with the exception of the period 1995-2000. One of the Commission’s recommendations is a larger role for the private rental sector. This sector should become an attractive alternative to be able to respond better to changing housing preferences and the increasing flexibility of the labour market. Rabobank likewise advocates a growing role for this sector.
The full Dutch Housing Market Quarterly report will be available at www.rabobank.com/economics as of Wednesday 5 June at 10:00 AM CET.