Housing Market Monitor Group Economics -Macro Research -Sector & Commodity Research Housing shortage due to decline in housebuilding 11 February 2013 The housing market remains in a depressed state despite an upturn in the number of transactions in December The housing shortage is growing as housebuilding volumes remain low The improvement in affordability puts a floor beneath the housing market The housing market had another poor year. The number of transactions fell in 2012 for the sixth successive year. Two brief upturns were not sufficient to prevent the transaction volume from dipping to a new low of 117,000. June saw a short-lived boom as buyers sought to hurry through their purchase in anticipation of the lowering of the ceiling under the national mortgage guarantee (NHG) scheme and the planned increase in property transfer tax. A further 17,000 last-minute transactions were concluded in December, which was a third more than in the previous December. First-time buyers in particular were anxious to make their loan arrangements before the obligation to take out a repayment mortgage, which took effect on 1 January 2013. Many homes for sale despite sales peak Number 250000 15000 200000 12500 150000 10000 100000 7500 2009 2010 2011 2012 Homes for sale (lha) Number of transactions (rha, moving 12-month average) Sources: Statistics Netherlands (CBS)/Land Registry As people who sold their home in late 2012 are now looking for a replacement property, the volume of transactions may possibly show resilience in the first quarter of 2013. Afterwards, however, it will decline as a result of the less favourable tax treatment of owner-occupied homes. Only in 2014 will the number of transactions increase slightly, provided that the economy picks up as projected and confidence grows that the new tax rules will be maintained. The housing market reforms should receive broad political support for this purpose. A major determinant of the recovery of the housing market is affordability. This is improving, due in part to the low interest rates. In the course of 2012, mortgage interest rates fell in line with capital market rates. The average mortgage rate, including mark-up, was 4% at the end of 2012, which was half a percentage point lower than at the start of the year. Mortgage rates will probably remain low in the coming year, although the possibility of a modest increase cannot be excluded if, as currently expected, capital market rates rise slightly. An even more important factor contributing to the improvement in affordability is the fall in house prices. According to the CBS/Land Registry index, house prices dropped by almost 6% in 2012. After four years of steady decline, prices are now some 17% below their peak of 2008. Affordability, measured as a ratio of house value to disposable income, is gradually moving towards its historic average. Affordability may improve still further if sellers are willing to lower their asking price again. The number of houses on the market in December was huge (228,000). Based on the present transaction volume, it will take almost two years before this backlog has disappeared. In these circumstances, sellers have two options: lower their asking price or take their property off the market. However, not all sellers are reconciled to the new situation. This is apparent from the average asking price of properties for sale. Since September 2008, this has fallen by EUR 22,000 to EUR 307,000, whereas the average transaction price has fallen much more sharply, by EUR 36,000 to EUR 222,000. Although an improvement in affordability generally has a positive effect on demand for owner-occupied properties, potential buyers are as yet still few and far between. In December, the Market Indicator of the homeowners association (Vereniging Eigen Huis) reached a new low. The myth of ever-rising house prices has lost much of its credibility since 2008. As a result of the continuing decline in house prices, more and more households are faced with negative home equity.
2 Housing Market Monitor - 11 February 2013 The risks of home ownership are also evident from the growing (but still limited) number of households facing payment problems. On balance, over 2% of households are in arrears with their mortgage payments. Moreover, according to the NHG, the number of foreclosures resulting in a sale at a loss increased further from 2,000 in 2011 to 3,500 in 2012. In total, the NHG paid out claims amounting to EUR 97 million in 2012, compared to EUR 61 million in 2011. As a result of this increase, it has been obliged to raise the premium for new guarantees from 0.70% to 0.85% in 2013. At present, about 90% of all purchases under the ceiling for the scheme (currently EUR 320,000) are financed with NHG backing According to the NHG, the main causes of the foreclosures are divorce or separation (61%) and unemployment (16%). The prospect is for a further increase in unemployment. The uncertain labour market will make potential buyers extra cautious. Against this background, it remains to be seen whether buyers will be eager to take advantage of the greater discretionary powers of banks to provide a tailor-made service. In the future, banks will be able to grant a higher mortgage to buyers with good income prospects, even if their anticipated salary increase is still more than six months away. The low propensity to buy is evident from mortgage loan applications. According to the banks, these are still weak. The outstanding mortgage loan volume grew by 1.5% last year, which represented a halving of the growth in the previous year. This slowdown is due to lower mortgage origination: EUR 47 billion in 2012, less than half of the 2008 volume. The decline is attributable to the fact that fewer mortgage loans are being granted. The number of new mortgage loans fell by 50,000 to 200,000 in 2012. Moreover, the amounts granted were also lower. The average amount borrowed was EUR 261,000 in 2012 compared to EUR 286,000 in 2011. The decline in the mortgage origination volume is due not only to buyer caution but also to stricter mortgage standards. Since 2009, the National Institute for Family Finance Information (Nibud) has constantly lowered the maximum amount of mortgage loans for all income groups, the main reason being that household budgets for home expenditure have been squeezed by higher health insurance premiums and pension contributions. The reduction in the maximum mortgage loan amount will be even greater this year. The maximum mortgage for someone under the age of 65 with a gross income of EUR 50,000 will be EUR 224,000 at a mortgage rate of 4.75%. That is EUR 25,000 less than last year, or a reduction of 10%. Another factor putting a brake on mortgage lending is the reluctance of banks. Since the outbreak of the financial crisis, banks have continuously tightened their acceptance criteria for mortgage lending. Their immediate priority is to strengthen their capital buffers, given the uncertain economic outlook and future changes in the financial regulatory framework. Stagnation in demand and supply of mortgages 100 50 0-50 -100 Bron: DNB Based on survey data 2005 2007 2009 2011 2013 Acceptance criteria (positive value reflects tightening) Changing demand (negative value reflects decline) The recent adjustments to the Basel III framework do not encourage banks to increase their mortgage lending, even though the liquidity requirements in respect of securitisations have been relaxed. The required liquidity buffer of banks may comprise securitisations up to a maximum of 15%. At first glance, this seems to make it easier for banks to obtain funding from other banks for their mortgage portfolio through securitisation. Nonetheless, things are more difficult in practice. Banks and insurers investing in securitisations must comply with strict capital requirements, which largely cancel out the advantage of the more relaxed liquidity requirement. Moreover, the adjustment only applies to securitisations with a maximum loan to value (LTV) of 80%. As the Netherlands has a large number of maximum-value mortgages, this percentage can be achieved only by including mortgages with a low LTV in the securitisation packages. Another possibility is to defer securitisation until sufficient repayments have been made on new mortgage loans. However, this last alternative will require considerable time, despite the repayment obligation for new borrowers that took effect on 1 January 2013. Although the relaxation of the liquidity requirements will not refloat the stranded securitisation market, some clear signs of improvement in this market have recently emerged. For example, recently issued securitisation packages were eagerly underwritten by investors, partly due to the low default rate. In addition, investors are becoming more confident that the
3 Housing Market Monitor - 11 February 2013 economy has now passed the trough and are looking for riskier investments yielding a higher return. Lender caution, the present fragility of the economy and the less favourable tax climate for home ownership are combining to hold back the market for owner-occupied properties for the time being. Nonetheless, improved affordability means that the bottom is now in sight. Another reason for the stabilisation of the market is the ever shrinking housing stock due to the disappointing level of housebuilding. In 2011, house completions totalled a mere 58,000. This number was substantially lower than in the period 1995-2010, when 76,000 new homes were completed on average each year. Allowing for the demolition of existing homes and the balance of additions to and removals from the housing stock as a result of changes in permitted use, the total number of units added to the housing stock in 2011 was just under 54,000. This compares to an annual figure of over 67,000 in the period 1995-2010. Evidence that housebuilding will not pick up for the time being and that the housing stock is shrinking is provided by a series of red flag leading indicators. For example, the building contract value of new orders received by architects, which is a barometer of construction activity, has been falling for some time now. In the first three quarters of 2012, the index was almost 17% lower than in the same period in 2011 and currently stands at just a quarter of its 2007 level. Architects report decreased workload Index 2007 = 100 100 75 50 25 The number of planning permissions issued for the rental sector is more stable. Last year, approximately 15,500 permissions were granted for rental properties, compared to 18,000 in 2011. However, the number of planning permissions issued for rental properties may come under further pressure in 2013. The housing corporations the main source of construction orders in the rental sector are facing a landlord levy, which will restrict their financial leeway. In addition, the Social Housing Guarantee Fund (WSW) has limited its guarantee scheme. Housing corporations can no longer apply to the WSW for guarantees if they wish to build rental and owner-occupied dwellings in the mid-price range. Steady fall in number of planning permissions granted 70000 55000 40000 25000 10000 Source: CBS Number 2007 2008 2009 2010 2011 2012 Number of planning permissions issued for owner-occupied properties Number of planning permissions issued for rental properties The decline in the building contract value of new orders received by architects and the fall in the number of planning permissions issued reflect the malaise gripping the housebuilding sector. This malaise is also expressed in housebuilders order books, which have shrunk steadily since April 2011. As the graph below shows, this is the second dip in order books for housebuilders. In December 2012, they had orders for 5.2 months, compared to 6.9 months as recently as April 2011. This was in itself already a much lower level than in March 2008, when there were orders for 9.9 months. 0 2008 2009 2010 2011 2012 Value of new orders received by architects (4-quarter moving average) Source: Statistics Netherlands Nor does the number of planning permissions for residential properties give much cause for hope. Fewer planning permissions have been issued for owner-occupied properties in particular. The number of permissions is expected to have fallen from over 38,000 in 2011 to around 21,500 in 2012.
4 Housing Market Monitor - 11 February 2013 Double dip in housebuilders order books Number of months work in hand 10 8 6 4 2008 2009 2010 2011 2012 Housebuilders' order book Source: EIB As sale prices are under pressure, housebuilders are finding it increasingly difficult to build homes on a profitable basis. The situation is exacerbated by the continuous rise in wage costs and materials prices. It makes little difference to these firms whether they are building for the owner-occupied or rental markets. The difference in costs per cubic metre is minimal. Land prices are another important cost item, and have risen sharply since 2006. Contractors are therefore urging the municipal authorities to reduce land prices, but such requests have often been in vain. Before the start of the economic crisis, municipalities had purchased land at high prices and had already based their budgets on the expected sale revenues. Selling land at a lower price will put a heavy burden on their finances. Nonetheless, the tide seems to be turning. More and more municipalities are writing down the value of the land in their books. Building costs rising and tender prices falling Index 2005 = 100 170 150 130 110 90 2005 2006 2007 2008 2009 2010 2011 2012 Land prices Tender price of new-build homes Materials Output index Wages Source: Statistics Netherlands, NVM, BZK, WBI/NEPRON The combination of lower selling prices and higher costs is resulting in lower margins and poor results in the construction industry. This is confirmed by the output index, which shows the general overheads and profits of contractors. This output index has been falling since 2009. Many housebuilding firms are forced to write down their investments in land, thereby worsening their balance sheet. Turnover in the construction industry has fallen by almost a fifth since 2008. As a result of the decline in turnover and the rising level of expenditure, net earnings are under pressure. More and more businesses are making a loss. In 2011, 64% of businesses engaged in residential and utility construction were still making a profit. This number is expected to have fallen further in 2012. The average profit margin has already shrunk from 3.5% in 2010 to 2.7% in 2011. The decline in profitability on both total assets and shareholders equity is also borne out by the rise in the number of insolvencies in the industry from 660 in 2008 to 1,525 in 2012. At the start of the financial crisis, it was thought that housebuilding would recover after a few years, but this is now subject to increasing doubt. As many housebuilding firms are eating into their own reserves, they are having more and more difficulty funding new projects. The number of owner-occupied properties in the pipeline fell sharply in the period from 2008 through 2009. After a brief upturn in 2010, this index has once again been falling since the second quarter of 2011. Fewer new-build homes in the pipeline Number 70000 60000 50000 40000 30000 2005 2006 2007 2008 2009 2010 2011 2012 Owner-occupied properties in the pipeline Source: Statistics Netherlands, NVM, BZK, WBI/NEPRON All of this justifies the expectation that the number of completed new-builds will continue to fall. It is thought that 52,000 new properties were built in 2012 and that this number will fall to 47,000 in 2013. In keeping with the downward trend in housebuilding, the number of homes demolished is expected to fall to 9,500 in 2012 and 9,000 in 2013. Similarly, the number of residential properties removed from the housing stock as a consequence of a change in permitted use will be lower in 2012 and 2013 than in 2011. This means that the
5 Housing Market Monitor - 11 February 2013 housing stock rose by almost 49,000 in 2012 and will rise by a further 44,000 in 2013. Housing stock growing less fast 2010 2011 2012 2013 Additions to housing stock 49,568 53,918 48,750 44,000 New-build homes 55,999 57,703 52,000 47,000 Of which owner-occupied 34,569 35,237 32,000 30,000 Of which rental 21,430 22,466 20,000 17,000 Balance of change in permitted use 5,191 6,635 6,250 6,000 Demolition -11,622-10,420-9,500-9,000 Source: Statistics Netherlands, ABN AMRO, 2012 and 2013 are estimates The increase in the housing stock is insufficient to meet the needs of the population. Whereas it was still sufficient in the period 1995-2009, when the number of households rose on average by 61,000 a year and the housing stock grew by 65,000 units annually, the expansion of the housing stock failed to keep pace with the increase in the number of households in 2010 and 2011. In 2010, the number of households rose by 61,000 and the housing stock by approximately 50,000 units. In 2011, there was once again a shortfall, which amounted to 8,000 units. As the level of activity in the housebuilding sector continues to fall off, the expansion of the housing stock is failing to match the increase in the number of households. The number of households continues to rise as a result of immigration and the increasing number of people living alone. Consequently, the gap between the number of households and the housing stock is in danger of becoming ever wider. Housing shortage increases again Number of households on 1 Jan (x 1000) Housing stock on 1 Jan (x1000) Shortfall (in %) 2000 6,801 6,590 3.2 2005 7,091 6,859 3.4 2010 7,386 7,172 3.0 2011 7,447 7,218 3,2 2012 7,509 7,266 3.3 2015 7,701 7,428 3.7 2020 7,968 7,682 3.7 Source: Statistics Netherlands, Primos, 2012, 2015 and 2020 are estimates The housing stock is expected to grow by approximately 500,000 units in the period 2011-2020, which compares poorly with the increase of over 600,000 units in the period 2001-2010. As the housing stock will grow more slowly than the number of households in the years ahead, the housing shortage will increase from 214,000 units in 2010 to 286,000 in 2020. Over this period, the housing shortage will rise from 3% to 3.7% of the housing stock. Due to the expected increase in the housing shortage in the period 2010-2020, young first-time buyers have to wait longer before they can get on to the housing ladder. They will be obliged either to share a home or to make do with less suitable accommodation. For example, they will have to remain in rented rooms for longer and will be increasingly reliant on finding temporary living accommodation such as offices. The housing shortage will be greatest in the Randstad conurbation in the west of the country, followed at some distance by the provinces of Gelderland and Noord-Brabant. Whereas the province of Utrecht faces problems in both the owner-occupied and rental sectors, the main problems of the provinces of Noord-Holland, Zuid-Holland, Gelderland and Noord-Brabant are in the rental sector. The rental sector is expected to become more important, although the number of cheap rental properties is diminishing. Medium and higher income groups that are currently occupying a cheap rental property are making way for low income households. Many tenants are facing rent increases as a consequence of the coalition agreement. This applies in particular to the 390,000 households with a high income (over EUR 43,000) and which are occupying a low-rent property. The majority of these tenants will probably move to a property in the more expensive rental sector. The market for more expensive rental properties is already picking up. Websites for rental properties are reporting a sharp increase in visitors. Although the majority of tenants living in properties that are too cheap for their income will probably switch to a more expensive rental property, the owner-occupied sector may be an attractive alternative for them in the long term. In view of the stricter mortgage lending rules and the unfavourable economic climate, however, it may be some time before these households actually make the switch to the owner-occupied sector. The preference for rental properties is growing since an owner-occupied property is no longer an automatic guarantee of wealth accumulation. Moreover, renting provides greater flexibility for people who have to change jobs relatively frequently. Against this background, it seems likely that the rental sector will gain in importance in relation to the owneroccupied sector in the years ahead. However, this is conditional upon investors putting more money into rental properties. And investors will be persuaded to do this only when there is political certainty about the reforms of the rental market.
6 Housing Market Monitor - 11 February 2013 Important information This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. Copyright 2013 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO)
7 Housing Market Monitor - 11 February 2013