Housing Market Monitor

Housing Market Monitor Off to a great start Group Economics Philip Bokeloh 020 383 26 57 9 April 2015 The Dutch housing market got off to a flying start in 2015 with transaction volumes and prices continuing to rise. Falling mortgage interest rates and the economic recovery are both major impulses for the housing market. The new-build market is also picking up. The number of issued permits indicates a further improvement. How did the housing market start the new year? The housing market got off to a flying start this year. According to Statistics Netherlands/Land Registry data, the transaction volume in January and February worked out at over 21,100. In the first two months of the year, almost 12% more houses were sold than in the same period of 2014. This was the largest number of homes sold in January and February since 2008. Interestingly, the sales share of the higher price segments is on the rise. This suggests that first-time buyers are now being joined by existing homeowners who are looking to move up the property ladder. Also salient is the fact that all regions are benefiting from the upturn, though the strongest resurgence in sales can be seen in the economically successful cities. sold in the past twelve months, almost 10,000 more than in the previous year. Improving new-build market In thousands 60 50 40 30 20 10 0 00 02 04 06 08 10 12 14 New-build sales (12-month average) Like the transaction volume, house prices are also continuing to rise. The Statistics Netherlands/Land Registry price index for February was 2.4% higher than in the same month a year ago. Compared to the low of June 2013, the price level has climbed almost 4%, but is still more than 18% below the peak of August 2008. Despite the improvement it is still too early to speak of a buyer s market. Houses are changing hands faster than in previous years. Properties sold by NVM real estate brokers were on the market for four months on average, compared to six months previously. However, this is still longer than the historical average of three months. The stock of houses for sale has also decreased but remains sizable at 175,000 properties compared to the pre-crisis stock of 120,000. Barring exceptions, therefore, buyers still enjoy a more favourable bargaining position than sellers. This is probably why asking prices are still not going up. Is the new-build market also on the mend? Green shoots can also be seen in the market for new-build housing. No sales figures are known for the new year as yet, but the most recent figures are encouraging. According to the Dutch Builders Association, 25,000 new-build houses were Source: NVB The increase in sales is confirmed by the New-Build Housing Monitor, which also indicates that new-builds are selling faster. According to the New-Build Housing Monitor, the average selling period was 200 days in the twelve months until the end of September 2014, which is 100 days less than a year earlier. The stock of properties for sale is also dwindling steadily. Despite the rising sales volume and shrinking stock for sale, the selling price of new-build housing is falling. In September 2014 the average price was EUR 241,000, EUR 5,000 less than a year earlier. However, this decline is due less to a lack of buyer interest than to the preference of project developers to build cheap homes for the first-time buyer market. Project developers are seeking to keep their costs in check by building smaller houses with less luxurious finishing. The most recent figures, however, point to a turnaround. According to Statistics Netherlands, house completion data show that houses are becoming bigger in cubic metre terms. If this trend continues, new-build prices will also soon start to rise. Construction firms are anticipating a further improvement in the market. The pessimism in the sector is disappearing now that

2 Housing Market Monitor - Off to a great start - 9 April 2015 architects are receiving more assignments and the order portfolios of construction companies are growing. This upturn is confirmed by the rising number of issued permits, which points to accelerating construction activity in the near future. Given that the contraction was partly due to the slowdown in construction investments, this will also give the economy an impulse. After years in the doldrums, housing construction is finally reasserting itself as a contributor to economic growth. locations) made it possible to absorb the population growth regionally, while keeping the cities compact. Urban population growing faster than total population Percentage increase 2014 versus 2005 10 8 6 Investments in new-builds remain necessary according to the 4 demographic forecasts. It is estimated that the number of households will expand by 400,000 between now and the end of 2020. 1 Accommodation for an expected 75,000 of these households will be found by using the existing housing stock more efficiently and transforming retail and office space into 2 0 Other municipalities 35 large municipalities 4 largest municipalities housing. Source: Statistics Netherlands This means that 325,000 homes must be added to the stock, which will demand a major construction effort. An estimated 60% of the new stock will be for the owner-occupied segment, 25% for the social rented segment and 15% for the private rented segment. The greatest pressure is in the Randstad conurbation, where the number of households is growing the fastest. What explains the differences between city and country? The large regional differences in the development of house prices, property sales and new-build demand is largely due to the growing popularity of cities. Since the mid-1980s the urban population has been growing again, and is currently expanding at a faster rate than the overall population. Between 2005 and 2014 the number of inhabitants of the 39 largest cities grew by 6½%, twice faster than the total population of the Netherlands. The increase in the urban population is partly due to immigration from abroad. Immigrants tend to settle in cities first. Another factor is the influx of students, who increasingly opt to stay in the city after graduating. Even the arrival of children is no longer a reason to move elsewhere. With more and more families living in the city, the natural population growth is also accelerating. The popularity of cities is no coincidence. According to ABF Research, it has actually been stimulated by the government. 2 Due to municipal boundary changes, local government was given control over the spatial planning of larger areas. New urban development on the periphery of large cities (VINEX- 1 Poulus, C. (2015). Socrates 2014, ABF Research 2 Groenemeijer, L. (2014). Bevolkingsgroei in steden, ABF Research Moreover, as part of its urban renewal efforts, the government has invested in the public space: cities have been made safer, mobility has increased and cultural facilities have improved. All this makes the city a more attractive place to live, also for the higher income groups who now make up an increased share of the urban population. The reason for the urban stimulus policy is that cities play a crucial role in the knowledge economy. Companies are keen to locate close to a highly-trained workforce and knowledge institutes. The easiest place to find these is in denselypopulated agglomerations with good facilities for the inhabitants. The arrival of companies also creates jobs, making the city a magnet for newcomers. The demands on the quality of local government have increased due to this population growth. Now that health and welfare tasks have been delegated to the municipalities, the bar has been raised even higher. Municipalities that set up effective organisations will be able to provide good services at relatively low costs. Those that fail to professionalise, by contrast, will struggle to keep their services up to standard. The risk of a winner takes all effect is lurking in the background if the gap between successful and less successful cities widens. This is already noticeable among healthcare institutions. As insurers are unwilling to conclude contracts for less common procedures, small hospitals face financial pressure and the threat of closure. The retail sector provides another example of deteriorating regional services. Due to the shift in consumer behaviour towards online shopping and fun shopping, some municipalities are having difficulty maintaining a broad diversity of retail stores.

3 Housing Market Monitor - Off to a great start - 9 April 2015 Is the housing market leaning on the economic recovery? The reviving economy is a key factor in the recovery of the housing market. After two years of contraction, the economy returned to growth in 2014. The main growth engine is the export sector, which is also being fuelled by the lower euro. Business investments too are picking up again. Companies are benefiting from the low oil price and the reduced interest rates. Higher capacity utilisation levels are also spurring investments. Accelerating business investments are injecting fresh impetus into the labour market. Employment has been growing since the spring of 2014, but this has not yet led to any significant reduction in unemployment. The reason is that a growing number of people, encouraged by the improved prospects of work, are entering the labour market. As the number of newcomers in the labour market currently exceeds the rate of job creation, unemployment is still rising. Nevertheless, we think that a change is just around the corner. Both the falling number of dismissal requests and the expanding number of vacancies point in this direction. The improvement in the labour market is already leading to a cautious increase in wages. Higher wages, alongside moderate inflation, are good for the development of disposable incomes. The brightening outlook in the labour market and the rise in disposable incomes are reflected in the growing optimism among households. The consumer confidence indicator has been above the long-term average for a while now and, since March, has been at its highest level in more than seven years. Households are clearly less wary of spending. Retail sales are on the rise, and even high-cost items are moving faster. This consumer confidence is feeding through into the housing market: greater job certainty makes it easier to buy a house. The relationship between the economy and the housing market is a two-way affair, incidentally. In recent years, uncertainty about the value of their home and the threat of negative equity prompted households to save more and consume less. All in all, the dip in the housing market may have acted as a stronger drag on the economy, than vice versa. So the economy is clearly receiving a boost from the housing upturn. long fixed-rate periods. These contracts have a slightly higher interest rate than contracts with short fixed-rate terms. The decline in mortgage rates stems from the lower funding costs for banks. One important yardstick for the funding costs of banks is the swap rate curve, which has decreased in recent years. Banks can raise cheaper funding largely because the European Central Bank (ECB) has slashed official interest rates, thus pushing short-term rates lower. A further factor is the quantitative easing programme launched by the ECB in March. This is putting downward pressure on long-term interest rates. Every month, the ECB buys EUR 60bn of debt paper in the market in the hope to get lending flowing again. The ECB intends to keep this up until September 2016 and even longer if necessary. Mortgage rates fall further thanks to ECB policy % 6 5 4 3 2 03 05 07 09 11 13 15 Average mortgage rate for new contracts Source: DNB Structural factors are reinforcing the impact of the bond-buying programme on capital market rates. For one thing, due to all the austerity measures, the funding requirements of European governments are relatively small, so that government bonds are scarce. This scarcity is further aggravated by the fact that pension funds and insurers need to keep a close watch on their funding ratios. When interest rates fall, they are required to hold more perceived safe assets such as government bonds. The combination of increased demand and a limited supply has pushed the capital market rates markedly lower. Why are mortgage rates falling? According to the Dutch Central Bank (DNB), the average interest rate on new mortgage contracts was 3.1% in January. Interest rates are now half a percentage point lower than six months ago. This is happening at a time when a growing number of mortgagors are opting for mortgage contracts with In view of these structural factors plus the length of the bondbuying programme, capital market rates can remain low for a while, which also increases the likelihood of an extended period of low mortgage rates. This is all the more so now that new providers are venturing into the mortgage market, also from abroad. They think the

4 Housing Market Monitor - Off to a great start - 9 April 2015 conditions are right to challenge the established parties. The housing market is on the road to recovery. And though many homeowners still face a potential negative equity, the risks are manageable. This is clear from the small number of payment arrears, the low percentage of auctions and the stabilisation of loss claims under the National Mortgage Guarantee (NHG) scheme. However, regulations may still exert upward pressure on mortgage rates. Since the responsibility for banking supervision has been transferred to the ECB, the regulators are increasingly keen to prescribe uniform rules for European banks under Basel III. If this means that banks must hold more capital against Dutch mortgages in the future, the costs of mortgage lending will probably rise. What is happening in the mortgage market? Demand for mortgages is on the rise. This is evident from the DNB s quarterly survey among credit managers of banks. The increase is confirmed by Land Registry data, which show that 31,500 mortgages worth a total of EUR 7.3bn were extended in the first two months of this year. Compared to the same period last year, this represents increases of, respectively, 14% and 23%. Mortgagors who opt for a long fixed-rate period are less exposed to the risk of fluctuating interest rates. They can limit their financial risks even further by opting for annuity-based repayments and by taking out a lower loan relative to the value of their home. This, in fact, is what is happening on a large scale. The majority of mortgagors are opting for annuity loans. Maximum-value mortgages have become a rarity. Apart from risk aversion, these shifts are also being prompted by changes in the tax regime for mortgages and regulatory adjustments. Mortgage origination higher due to housing recovery EUR bn 150 125 100 75 50 25 0 06 07 08 09 10 11 12 13 14 15 Total mortgage sum (12-month average) Source: Land Registry We foresee a further acceleration in mortgage origination in the coming months. This expectation is based on the increase in the number of applications for mortgage quotes as recorded by Hypotheken Data Netwerk (HDN). These quotes are a forward-looking indicator for mortgage origination. The HDN data point to a growing preference for mortgages with long to very long fixed-rate periods. Mortgage loans with a fixed-rate period longer than ten years are gaining in popularity, which is understandable now that the sharp decline in long-term interest rates has resulted in an extremely modest interest rate differential between loans with short- and longterm fixed rates. The preference for long fixed-rate periods is also being fed by the mortgage criteria of the National Institute for Family Finance Information (Nibud). The Nibud uses the notional interest rate to calculate the maximum mortgage that homeowners are allowed to take out for short fixed-rate periods on the basis of their income. This notional interest rate is 5%, which is significantly higher than the rate on mortgage loans with long fixed-rate periods. By opting for a long fixedrate period, home buyers can thus access a higher maximum mortgage. What changes has the government implemented? The adoption of the Housing Act 2015 by the Senate in March has created clarity regarding the rules governing the rented social housing segment. Housing associations must focus on their core task: supplying accommodation to people on low incomes. They are only allowed to engage in other activities that market parties are not interested in undertaking and that are not financially too burdensome (as determined by the Social Housing Guarantee Fund). In addition, a Housing Association Authority will be set up to act as regulator. The revised Housing Act has given private investors more clarity about the investment potential in the rented segment. Encouraged by the National Government, which wants to stimulate the development of the middle segment, foreign investors have already made substantial investments in portfolios with rented housing. Not all municipalities have welcomed this initiative. In view of the waiting lists for rented social housing, some municipalities are opposed to these transactions and are contesting them in court. Another important change for the housing market concerns the ground lease system. To counter land speculation, various municipalities retain the ownership of the land on which houses are built. The leaseholder pays the municipality an annual amount for the use of the land. This annual ground rent

5 Housing Market Monitor - Off to a great start - 9 April 2015 is fixed for long periods of up to fifty years. After this period the municipality can change the ground rent. Clearly, large increases can come as a nasty surprise for the leaseholder. The ground rent system thus causes great uncertainty for homeowners and prospective buyers regarding their future housing costs. It also makes banks reluctant to extend mortgages. Energy-saving measures still limited Financed energy-saving measures from January to October 2014 Nr. High-performance glazing 324 Insulating doors 128 External wall insulation 121 Solar panels 91 Floor insulation 82 Roof insulation 80 High-performance boiler 68 Insulating roof panels 33 Solar boiler 19 Heat pump 14 Direct current or ventilator 8 Electricity-generating boiler or micro CHP 7 Personalised energy advice 5 Heat reclaim 5 Crawl space insulation 2 Source: National Energy Saving Fund This uncertainty has prompted several municipalities to review the ground lease system. Utrecht is the first of the four large municipalities to abolish the ground lease arrangement. In the new plans homeowners will become the outright owners of the land on which their house is built. The new system will initially be implemented for new-build housing, and later also for existing housing. The municipality of Amsterdam has also approved a change in the ground lease system. In this municipality, homeowners will be given the opportunity to buy out the ground lease in perpetuity. A final important change concerns the energy label. Several years ago, a measure was introduced obliging homeowners to show an energy label to the buyer or new tenant of their property. In practice, however, this obligation is rarely observed due to a lack of enforcement. In a bid to change this, the government sent provisional energy labels to all homeowners in January and February. These provisional labels are based on public information, such as construction year, type of property and surface area. Homeowners can go online to change the data if necessary and make the label definite. When the property is sold, the definite label must be presented to the buyer. The fine for failing to comply is EUR 405. A seller who upgrades the label with manipulated data is guilty of fraud. In introducing the energy label, the government hopes to reduce the residential CO2 emissions and move closer to achieving the internationally agreed emission targets. The idea is to make homeowners more energy-conscious and prompt them to take energy saving measures. The energy and home maintenance sectors have seized upon this measure as an opportunity to inform homeowners of the various options for making their homes more comfortable and cutting their energy costs. If these efforts are successful and the energy label becomes a standard part of property transactions, prospective buyers will also get better insight into their future housing costs and be able to make more well-informed decisions. Do any other policy adjustments lie ahead? The current cabinet has introduced far-reaching reforms in various areas. One issue that remains outstanding is the reform of the tax system. According to several studies, this could yield substantial economic gains. The cabinet is keen to tackle this issue now. Its aim is to introduce a new tax system with lower tax on work, and thus stimulate employment. Changes to the tax system are relevant to the housing market, which currently benefits from strong tax incentives such as mortgage interest relief. According to calculations of the Amsterdam School of Real Estate, the total mortgage tax relief for households will in due course fall to EUR 11.4bn. This is significantly lower than the EUR 15.6bn that was deductible before the restrictions on mortgage interest relief were imposed, but it is still a substantial amount. The cabinet is aware of the housing market s sensitivity to tax changes. In a letter to the House of Representatives, State Secretary Wiebes noted that home ownership was already at the receiving end of this cabinet s most far-reaching reform. And that the cabinet did not consider it expedient to confront the housing market with further adjustments as part of the reform of the tax system. The cabinet has thus explicitly stated that it wants to leave home ownership out of the tax reforms. In taking this position, the cabinet has chosen to ignore the wish of the European Commission. Brussels has repeatedly pressed for the accelerated implementation of the current adjustments, and even thinks that the measures should go further than planned. Within the Netherlands too, there are calls to take the housing market on board in the tax reforms after all. The Dutch Association of Real Estate Brokers (NVM), for instance,

6 Housing Market Monitor - Off to a great start - 9 April 2015 reminded the cabinet of the reform proposals that it presented at an earlier stage in Wonen 4.0. And the DNB also entered the debate, arguing that home ownership should in due course be transferred from the income tax (box 1) to the wealth tax sphere (box 3) on a tax-neutral basis. If there are no tax incentives, the obligation to make repayments on an annuity basis will automatically be cancelled, says the DNB. Given these external pressures, it is uncertain whether the cabinet will succeed in reforming the tax system without touching the housing market all the more so now that it no longer has a majority in the Senate. Due to the results of the recent provincial elections, the cabinet cannot even count on a majority with the support of the cooperating opposition parties. If the cabinet wants to reform the tax system, it will need to get round the table with even more opposition parties. So the outcome of the tax reforms promised by the cabinet is very much up in the air. Forecasts The housing market got off to a stronger start than we expected in 2015. There were more transactions than foreseen. We expected the limitation of the gift tax exemption in 2015 to have a dampening effect on the number of transactions, partly because of transactions being brought forward to 2014. But the moderating effect has been much less marked than anticipated. One possible explanation is that the sales boom in December is still having a knock-on effect: the sellers at the end of the year are now entering the market themselves. Prices are also rising faster than predicted. In December we made a slight downward revision to the estimates in response to the stricter Nibud loan to income criteria. But here too, the moderating effect has so far been less pronounced than expected. This may be because more people are taking out mortgages with longer fixed-rate periods. The Nibud s restrictions are less stringent in this case, so that buyers can borrow a larger mortgage than if they had opted for a mortgage with a short fixed-rate period. However, as we only have the data for the first two months, we think it is too early to revise our estimates upwards. The stabilisation of the confidence indicator of the Homeowners Association (VEH) after two years of increases also suggests that caution is in order. That said, there is still a good chance that we may have to revise up our housing market forecasts in the next publication. The housing market, after all, is benefiting from the economic revival, which is more powerful than initially thought. Another key factor is that interest rates are falling because of the actions of the ECB. These low interest rates are keeping houses affordable. The influence of interest rates on housing costs can be seen in the Calcasa affordability indicator, which sets off net housing costs against net income. Significantly, this indicator is continuing to improve despite the fact that house prices are rising again. Price and transaction forecasts Transactions (% y-o-y) Prices (% y-o-y) 2014 39.4 0.9 2015 0 1 2016 10 2 Source: Group Economics

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