Housing Market Monitor

Transcription

1 Housing Market Monitor Group Economics 2 November 2012 The brief upturn in the housing market in June was quickly nipped in the bud by the disappointing performance in the third quarter The housing market is being adversely affected by the weak economic situation at home and abroad Despite improved affordability, the housing market is still overpriced by historical standards While the new government is restricting mortgage interest relief, it will allow relief on the interest paid on residual debts It remains to be seen whether mortgagors with negative residual equity will be able to benefit from this tax relief ABN AMRO is sticking to its original price and transaction forecasts as the adjustment to mortgage interest relief is only limited The creation of a separate ministerial post for housing by the VVD and PvdA coalition partners is in keeping with the trend towards centralisation of housing policy The operation of market forces in the rental market is set to improve as the level of rents is being linked to the value of the property Although banks are extremely cautious about lending, the mortgage volume will continue to rise for the time being The housing stock remains limited due to the decline in housing construction The situation in the Dutch housing market has worsened significantly in recent months. Uncertainty about the economic situation is discouraging potential buyers. Another adverse factor is the continuing high price of homes. And future changes in housing market policy are a further deterrent. Another factor is the difficulty of obtaining credit from banks. This is a problem not only for first-time buyers but also for homeowners who are looking to move up the property ladder but are in negative equity. Despite the constraints on lending, the total mortgage volume is still growing, albeit at an increasingly modest pace. Although the incoming government has announced important structural reforms, it will be years before the situation in the housing market returns to normal. Housing market climate continues to worsen The crisis in the housing market has already dragged on for four years with no end yet in sight. On the contrary, the situation has deteriorated in recent months. According to the CBS/Land Registry index, house prices dropped more sharply in July than at any time since the start of the series in Prices fell by 3½% m-o-m and 8% y-o-y. In the absence of any improvement, the fall in value in August and September remained 8% y-o-y. The house price index is now over 16% below its peak in August The glimmer of hope that followed a few surprisingly favourable housing market figures in June was quickly extinguished by the weak third quarter performance. In June, house prices were actually slightly higher than in May, and the number of sales (over 16,000) was so high that the transaction volume in the first six months of 2012 ultimately remained at the same level as in the 2011 first half. This was something of a feat, as the number of sales in the preceding five months had been extremely low. Prices fall sharply after brief rally in June 220, , , , , Number of transactions (12-month average, lhs) House prices (% yoy, rhs) Source: CBS & Land Registry The brief rally in June was probably attributable to the fact that two buying incentives would be discontinued with effect from July. Buyers expedited their purchase in order to benefit from the ability to obtain mortgage finance under the national mortgage guarantee scheme up to EUR 360,000. In July, this maximum was lowered to EUR 320,000. In addition, buyers assumed that the temporary reduction in property transfer tax from 6% to 2% would end in July. This was an added reason to hurry through their home purchase. With the benefit of hindsight, buyers' haste in June to qualify for the temporary reduction of property transfer tax was unnecessary. The government has now made the reduction permanent. This is favourable for the housing market as it will provide a lasting boost. Nonetheless, the measure will

2 2 Housing Market Monitor - 2 November 2012 unfortunately afford little support in the short term. Unlike the situation in June, few potential buyers now regard this as a reason to speed up a purchase. This is reflected in the number of sales in the third quarter, which was a quarter lower than in the same period a year ago. Discouraged sellers are taking their properties off the market. Despite the small number of sales, the number of properties on the market fell slightly in the third quarter. There are now 228,000 homes for sale, which is 2,000 less than in July. This decline is mainly because sellers are becoming disheartened. They are not receiving offers that are even remotely close to the envisaged sale price. The average sale price in September was 30% below the average asking price of properties for sale, which amounts to an average difference of EUR 90,000. This substantial disparity between the asking price and the sale price is largely due to the difference in the composition of the stock of properties sold and that of the properties on the market. Given this situation, many sellers must reduce their asking price if they wish to sell their home. By no means are all sellers prepared to do so. Many prefer to remain in their home rather than to reduce their asking price. Sales of all types of dwellings in decline % All dwellings Terraced houses End-of-terrace houses Semi-detached houses Detached houses Apartments Decline in transaction volume since 2006 Price fall since August 2008 Source: CBS The malaise in the housing market is visible everywhere. The prices of all types of dwellings, from apartments to detached houses, have dropped sharply from the peak in August The price adjustments were greatest at the top end of the market. The value of detached houses fell by a total of 20%. However, this adjustment is not all that much greater than that of terraced houses the category whose value fell the least (15%). And in terms of transaction volume, the slowdown is somewhat less dramatic for detached houses than terraced houses. Compared with the top year of 2006, 40% fewer detached houses and 50% fewer terraced houses were sold in the period up to and including August. The malaise is also broad-based from a geographical perspective. In relative terms, the largest price falls since August 2008 have been in the east and south of the Netherlands and the smallest in the north and west. These regional differences are reflected in cities such as Apeldoorn and Eindhoven, where prices fell more sharply than in, say, Rotterdam and Leiden. It is also noticeable that the popularity of towns and cities has remained intact. While the rise in values in the lead-up to the price peak of August 2008 was larger in urban areas, on average, the price fall has been more modest. Towns and cities benefit from the influx of younger households, and rural areas are suffering from the combined effects of an ageing population and a declining proportion of young people. Meanwhile, the number of homeowners unable to pay their mortgage is increasing. According to the Mortgage Barometer of the National Credit Register, 76,000 people are expected to have mortgage arrears of four months or more by the end of this year; an increase of 14,000 on the start of This figure is also larger than the increase of 11,000 forecast earlier this year by the National Credit Register. On balance, 2% of the 3½ million households with a mortgage are experiencing payment difficulties. According to the National Credit Register, this situation is partially due to the continuing fall in house prices. In the past, people could expect to make up for any fall in income by selling their home and using the surplus value to pay off any debts. This escape route has been closed since there are now few transactions and prices have also fallen. In the twelve months to the end of September 2012 there were 2,700 foreclosure sales. This means that sales at public auction accounted for 2½% of the total number of sales during this period, compared with 2% in the year-earlier period. Nonetheless, the percentage is still too modest either to have a significant effect on prices or to cause mortgage lending losses to rise appreciably. When compared with the total mortgage portfolio of Dutch banks, the losses are still negligible. Uncertainty about the economy A major cause of the present weakness in the housing market is the uncertain economic outlook. The eurozone recession is the logical result of a policy of stringent austerity measures. Governments of periphery countries are trying to halt the rapid worsening of public finances by cutting expenditure. It is debatable, however, whether this actually helps to put their budgets back on a sound footing. After all, each euro saved causes a further decline in domestic demand. As external demand is weak since other countries are also cutting

3 3 Housing Market Monitor - 2 November 2012 expenditure, GDP growth is, on balance, continuing to decline and less and less tax revenue is being generated. Against this background of continuing uncertainty the ECB's decision to embark on a programme of purchasing government bonds was very welcome. The ECB can, in principle, make unlimited purchases of sovereign bonds and thus keep the capital market interest rates of member states low. By keeping this option open, the ECB has managed to quell the growing unrest in the financial markets. The decision has resulted in a decline in capital market rates in distressed countries such as Spain and Italy. The equity markets have also responded positively to this unconventional measure. Thanks to the ECB, the politicians have gained time in which to implement the structural reforms necessary for recovery. For the time being, Group Economics is assuming that policymakers will manage to sustain this positive trend. We therefore predict a modest economic recovery in the eurozone in the course of next year. The Netherlands is slightly ahead of the game in this respect. The economy will grow in 2013 by a half percent after shrinking by the same percentage in In view of the continuing weakness of the economy, the ECB will probably maintain its loose monetary policy and leave official interest rates unchanged. While short-term rates will remain low, long-term rates will rise. Meanwhile, capital market rates will return to their normal levels. Once investors are again willing to take some risk in the peripheral countries, they will be less reliant on safe German and Dutch bonds. This means that capital market rates in the Netherlands will rise again from 1½% at the end of 2012 to 2½% at the end of Given the prospect of a modest economic recovery and a gradual rise in interest rates, there is little reason to expect a rapid recovery in spending. Besides, unemployment will rise further from 5½% at the beginning of 2012 to 7% at the end of The uncertainty in the labour market makes families more cautious about big-ticket purchases, particularly since the new government has announced major cuts in unemployment benefits. This is reflected in low consumer confidence. Although the consumer confidence index has picked up slightly in recent months, it is still close to an historic low. The same is true of the Market Indicator of the homeowners association Vereniging Eigen Huis. This indicator, which is based on how consumers assess house prices, mortgage rates and the overall conditions for buying a house, is still at an exceptionally low level despite the improvement since June. Prices still high Whereas the steady increase in prices from the early 1990s actually encouraged people to buy, the overriding attitude now is one of caution. The continuous fall in prices since August 2008 has put an end to the narrative that house prices can only go up. And it has also put to rest the myth that there is no more secure investment than one's own home. More and more people now prefer renting to buying. All things considered, the preference for renting is not so strange. The graph of house prices corrected for inflation shows that prices have fallen by more than a fifth since their peak in That's quite a lot. But despite this fall, real house prices are still at the level of mid-2000, a year in which house prices rose in real terms by 16%. In terms of price rises, the year 2000 was the absolute record-breaker in a decade in which house prices more than doubled. So real prices may have fallen sharply, but they must fall a further 20% before they reach the average level for the period since House prices well above the long-term average Index (1975 = 100) House price index corrected for inflation Source: CBS & Land Registry However, the suggestion that valuations based on real price performance are at a high level requires some qualification. The underlying assumption is that a dwelling is a consumer good whose price should change more or less in line with that of all other goods. This is an oversimplification. First of all, the economic life of a house is much longer than that of, say, a cheese roll. Many houses in the Herengracht in Amsterdam are still intact after more than 300 years while all that's left of a cheese roll, once consumed, is a few breadcrumbs. As the consumption of a home is spread over a much longer period, changes in income are relevant to the valuation of the housing market. In addition, a house is a major expenditure item, which is often financed by debt. The availability of credit and the level of interest rates therefore influence house prices.

4 4 Housing Market Monitor - 2 November 2012 A better yardstick for assessing the present price level is affordability. Various indicators can be devised for this. The simplest is the ratio of house prices to gross income. For single-income households with a median income, this ratio stood at 6¼ in the third quarter of This was, in itself, an enormous improvement on the 8¼ reached in the second quarter of Nonetheless, the current value is still far removed from the average ratio of 5¼ for the period since To reach this level, prices must drop by a further 15% or so, which is significantly smaller than the adjustment that could be expected on the basis of real prices. Nonetheless, the estimate that prices are 15% above the longterm average is still on the high side. This estimate is based on affordability for single-income households. However, since the second half of the 1980s homebuyers have been able to obtain a mortgage loan on the basis of two incomes. This adjustment was in keeping with the social trend away from the traditional breadwinner model towards a model in which both partners generate income. In the third quarter of 2012 the affordability ratio for two-income households was slightly below the long-term average since For two-income households, houses are therefore fairly affordable at present. As by no means all households have two incomes or are prepared to buy a home on the basis of two incomes, the ratios must be combined in order to make a final assessment of affordability. A combined affordability ratio for single-income and two-income households suggests that prices must fall by 10% if affordability is to return to the average level. Affordability has already improved considerably Affordability based on the ratio of house price to gross income Standard two-income households Median income Source: NVM & CPB The estimate that prices must fall by about 10% for affordability to return to its long-term average is also confirmed by more advanced affordability indicators that take account of interest and repayment obligations as well. In brief, the present price level is still above the historic average in terms of affordability, but the gap is quickly diminishing. Prices are expected to continue to fall over the next few years to a level at which affordability is equal to its long-term average. Nonetheless, the possibility cannot be excluded that affordability may actually fall below the long-term average for a while if the economic recovery takes longer than expected to materialise. Long-awaited clarification of housing market policy The large increase in house prices in recent decades was mainly a result of government measures to promote home ownership. Successive governments considered home ownership desirable, both because it enabled households to accumulate wealth and was assumed to enhance the liveability of local communities. The measures to encourage home ownership had the desired effect. Over half of households now own their own home. However, the increase in home ownership has been accompanied by a rise in mortgage debt. The total outstanding mortgage debt now amounts to EUR 640 bn, or 110% of GDP. The high level of mortgage debt by international standards raises eyebrows abroad. What is the financial capacity of individual households? Can the financial sector easily fund the debt mountain? And are government finances sufficiently robust to bear the burden of housing market policy? Hence, in the view of foreign observers, there are ample reasons for pressing for changes to housing market policy. Housing market policy has also come in for criticism in the Netherlands. For example, the issue of high-income low-rent tenants has been debated for years. This involves situations in which tenants whose incomes have risen continue to live in cheap rented properties. A related problem is the long waiting lists in the cheap rental segment. As a result, people with a modest income have no option but to rent an expensive house. There is also a difference of opinion about mortgage interest relief. As this tends to work in favour of the higher income groups, the redistribution of income achieved through the income tax system is partially undone. All these debates are ultimately about whether the housing market policy is efficient. The answer is no. But a solution to the problems is unlikely to be found quickly because whatever adjustments are proposed, there are always groups that will be disadvantaged by them. Lasting reforms of the housing market have been delayed for years because no political party wants to alienate a large group of voters. But this year has seen an end to the impasse in the debate about housing market policy. The shift started with the Spring Agreement. This provides that the rents of high-income tenants can rise faster, while the loan-to-value (LTV) ratio of owner-occupied homes is to be gradually reduced to 100% in

5 5 Housing Market Monitor - 2 November In addition, the temporary reduction of the property transfer tax rate to 2% was made permanent and the right to mortgage interest tax relief was scaled back. The interest on new mortgages can now be deducted only if the mortgage loan is repaid on an annuity basis. The latter change applies above all to first-time buyers, as existing mortgages remain unaffected. The measures from the Spring Agreement are open to numerous legal, tax and economic objections. Lawyers argue that the legislation discriminates between people who conclude a mortgage before 1 January 2013 and those who do so later. Tax specialists take issue with the complexity of the legislation. In their view, it will be hard for the tax authorities to administer the scheme. For example, what should be done about the obligation to repay part of the loan each year if someone is unable to do so because of unemployment or divorce? Economists warn that in practice, the Spring Agreement denies first-time buyers access to the housing market because of the obligation to make repayments on an annuity basis. This greatly increases the monthly expenditure of first-time buyers while the future benefit of the tax relief is substantially limited, without being offset in any way. Against this background it is still uncertain whether all the measures from the Spring Agreement will actually take effect on 1 January. New coalition keeps up the momentum Despite the various objections to the measures in the Spring Agreement, the VVD and PvdA coalition partners not only endorsed them in the new coalition agreement but also made a few important additions. The most far-reaching additions concern the social rental sector, where the points system for determining rent will be replaced by a system in which the level of rent is linked to the market value of the property. In future, the rent amount will total 4½% of the value for the purposes of the Valuation of Immovable Property Act. Rents may be raised by a substantial amount each year in order to arrive at this market-based rent. The rent of tenants with an income of up to EUR 33,000 may be increased annually by the rate of inflation plus 1.5%. Tenants with an income of between EUR 33,000 and EUR 43,000 can expect an increase equal to the rate of inflation plus 2½% and those with an income above EUR 43,000 will face an increase equal to the rate of inflation plus 6½%. To address the situation of high-income low-rent tenants, the maximum rental amount based on the market forces system will not apply to tenants of social housing whose income exceeds EUR 43,000. Rents for low-income households will remain affordable as the housing allowance is to be left intact. According to the calculations of the Netherlands Bureau for Economic Policy Analysis (CPB), the measures will result in a permanent rent increase of 10% and generate additional rental income of EUR 2½ bn in The government proposes to impose a special landlord levy equal to half this amount. The other half will accrue to the landlords. The more favourable letting conditions are intended to help increase the supply of rental properties and reduce scarcity in the rental sector. This will alleviate the pressure on the owner-occupied market in the longer term. In the short term, however, the prices of owneroccupied properties will receive a slight boost as letting will become less attractive for the higher income groups. The coalition agreement also includes various changes affecting the owner-occupied market. The most striking element is that mortgage interest relief is also to be limited for existing mortgage loans. The maximum rate at which homeowners can deduct mortgage interest is to be lowered from 2014 onwards by half a percentage point annually from 52% (which is the present marginal rate of the fourth tax band) to 38%. This will result in a very gradual adjustment and, according to the calculations of the Netherlands Bureau for Economic Policy Analysis, should yield an additional EUR 770 bn in tax revenue in the long term. The effect of this measure will be fairly small as the limitation of mortgage interest relief is modest, the adjustment to the new system will be very gradual and the additional tax revenues will be transferred back through lower income tax. The CPB estimates that the lasting long-term effect of these measures will be a 2½% fall in house prices. Hopefully, these measures provide long-term assurance about the tax treatment of mortgage interest so that potential buyers can enter the market with rather more certainty. It should be noted, however, that the adjustment of the rate of tax relief from 52% to 38% will take 28 years in total. This means that the six governments that follow the present government must also honour this agreement.

6 6 Housing Market Monitor - 2 November 2012 Many mortgagors in negative equity Loan-to-Value of mortgagors by year of purchase 125% 100% 75% post within the Ministry of the Interior. This is a welcome move as the complex subject matter requires close attention and great expertise. One of the first issues to be addressed by the Minister is the extension proposed in the coalition agreement to the lending facility of the Dutch Municipal Housing Incentive Fund for first-time buyers. By how much this facility will be extended is still unknown. This is why it is not yet possible to assess its impact on the housing market. 50% LTV2012, based on 50% interest-only and 50% annuity Source: CBS & Land Registry Another measure in the new coalition agreement is intended to provide a solution for homeowners who wish to move house but are in negative equity. They may deduct the interest payments on residual debt for a maximum of five years. To qualify for this measure, the borrower must pay off the debt in five years. Calculations by Professor Conijn show that 725,000 homeowners have a potential residual debt averaging EUR 35,000. Most households will find it tough to pay off such an amount within the five-year period. It is therefore doubtful that much use will be made of this scheme, for which an amount of EUR 150 bn has been set aside for the period Moreover, the details of the scheme have yet to be worked out. For example, what will happen to households that make the repayments promptly in the first four years but for some reason find themselves unable to do so in the fifth year? Will there be a penalty? In short, it is a good initiative, but the details must be worked out if the scheme is to be effective in practice. Until a solution has been found for people with a residual debt, a huge problem will continue to exist. The residual debts are concentrated among young households in urban areas who bought their home after To get on the property ladder, they were obliged to take on a high mortgage. But since purchasing their home, its value has depreciated rather than appreciated. They have also had little opportunity to accumulate capital. As such, they are hardly in a position to move house. The problem is exacerbated by the fact that few banks are currently willing to finance the residual debt when lending on another property. A well-considered policy plan to allow tax relief on interest payments on the residual debt might prompt the banks to change their minds. Centralisation of housing policy The VVD and PvdA coalition partners consider the housing market sufficiently important to merit a separate ministerial The decision to establish a ministerial post is in keeping with the trend towards greater government responsibility for housing policy. For example, the caretaker Minister of the Interior recently announced that in future, the central government would set the annual income criteria for mortgage lending. This centralisation of decision-making follows a disagreement that occurred when the Netherlands Authority for the Financial Markets (AFM) was unable to approve the expansion of the lending capacity proposed by the Home Ownership Guarantee Fund in consultation with the National Institute for Family Finance Information (Nibud). The cabinet put an end to the dissension by assigning responsibility to the central government. The central government will be advised by an independent institute, which can itself obtain information from the various stakeholders. The centralisation of housing market policy is intended to help streamline the policy initiatives. In recent years there has occasionally been a lack of coordination. Examples of measures to stimulate the housing market have included the lower property transfer tax referred to above and the temporary increase in the national mortgage guarantee scheme. These steps were intended to alleviate the adverse effects of other measures such as the stricter Mortgage Finance Code of Conduct and the reduction of the mortgageto-salary ratio by the Nibud. However, these diffuse policies compounded rather than reduced uncertainty in the housing market. Although it is still much too early to express a definite opinion on the centralisation. it is likely to result in a relaxation rather than a tightening up of income criteria for mortgage lending. This assessment is based on the fact that in practice, politicians tend to adopt a more flexible approach to rules than regulatory authorities. Confirmation is provided by the proposal of the caretaker Minister of the Interior to relax the rules on the temporary letting of empty dwellings and offices in order to prevent urban decay. Nonetheless, the new Minister for Housing will have no option but to take firm action. Purchasing power is being squeezed by the increase in the costs of health care and pensions. This means that households have less money left for housing. In view of the lower mortgage-to-salary

7 7 Housing Market Monitor - 2 November 2012 ratio, the new Minister will be bound to lower the maximum permitted mortgage, thereby creating a fresh obstacle for the owner-occupied market. Banks even stricter on mortgage lending stricter lending conditions if index > 0, relaxation if index < Source: DNB Acceptance criteria in past quarter Acceptance criteria in next quarter Lending policy far from generous Banks, too, have a responsibility in relation to the present stagnation of the housing market. Admittedly, there has been a sharp decline in demand for credit. The reluctance to buy on account of the uncertainty surrounding the economic outlook and the structure of the housing market is limiting the number of transactions and the demand for credit. On the other hand, banks have meanwhile tightened up their mortgage lending criteria. They have defended this by pointing out that for various reasons they are faced with higher costs. Banks feel constrained about lending because they are now required to maintain higher capital and liquidity buffers in order to meet the new Basel criteria. In addition, they are faced with the obligation to pay more tax. Another factor that is pushing up costs is the obligation to replenish the deposit guarantee fund. Previously, the banks set off the guarantees only after they had been paid out. Now, however, a fund is created in advance. Finally, the Dutch banks are heavily dependent for their funding on the public capital markets as they attract only a relatively small amount in savings and deposits. Most households save through their pension fund. This is regrettable for the banks because the public capital markets have become less accessible since the financial crisis. Until the start of the credit crisis Dutch banks largely relied on financing through securitisations traded in public capital markets, i.e. bundles of mortgages sold on to investors. This market suffered a blow following the major problems affecting US securitised subprime mortgages. The securitisation market has never completely recovered. This is partly attributable to the changes to the regulations on securitisations. The ECB has become more cautious about the acceptance of securitisations as collateral and has increased the capital charges. In addition, the new Basel criteria provide that from 2015, banks that purchase securitisations may no longer include them in the calculation of their liquidity buffer. The lower buffer means that banks can lend less. The proposed adjustment may have major adverse effects on lending worldwide. This is why regulators are now studying the scope for adjusting this policy. Covered bonds are an alternative to raising money in the capital market. Compared with countries like Germany, where the Pfandbrief market has long existed, the market in the Netherlands is still in its infancy. ABN AMRO introduced the first funding programme in 2005, when a total of EUR 2 bn was obtained through the issuance of covered bonds. The market received an extra boost following the implementation of national legislation in The market grew on the back of the increased transparency and security. In total, covered bonds worth EUR 10 bn were issued in 2010 and 2011, which is still relatively modest in comparison with the securitisation market. The modest size of the covered bond market is due to three factors. First, Dutch mortgages have a high Loan-to-Value (LTV), whereas the minimum LTV for European covered bonds is 80%. As issuers of Dutch covered bonds must therefore assign a relatively large number of mortgage loans to a programme in order to meet this European requirement, covered bonds are a relatively expensive form of funding. In addition, DNB limits the issuance of covered bonds by requiring a 'healthy' ratio between the scope of the covered bond programme and the net assets of the issuer. This 'healthy' ratio is fixed individually by DNB for each issuing bank, but is not disclosed. Finally, not all mortgage lenders use covered bonds to raise funds. Despite these constraints, it seems reasonable to expect that the market for covered bonds will continue to grow. A major reason for the expected growth of the covered bond market is that the total national mortgage portfolio will increase from EUR 640 bn in 2011 to EUR 675 bn in This forecast is based on the expected sales of new and existing homes. According to the New Homes Monitor, 18,500 new owner-occupied homes were for sale. The marketing information company BouwKennis expects a further 95,000 new owner-occupied homes to become available for sale in the period from 2012 to Allowing for the demolition of existing homes and the fact that some owner-occupied homes will remain on the market, an estimated 26,000 properties will be added to the homes-for-sale stock each year. And each

8 8 Housing Market Monitor - 2 November 2012 year, EUR 4½ bn in mortgage financing will be needed for this addition to the stock. This result is based on the assumption that the price of new homes built will move in line with that of existing homes and that the LTV on these mortgages will be at the market average of 70%. In addition, the mortgage volume will grow by EUR 10 bn as a result of transactions involving existing homes, since the LTV of newly concluded mortgages will generally be higher than that of the terminated mortgages. This is offset by only a modest amount in repayments. A small part of the mortgage debt is funded by traditional mortgage products, and the repayments from mortgage-related savings products are limited. Assuming that annual repayments will total EUR 3 bn, the total mortgage volume is expected to increase by EUR 12 bn annually. It follows that the total mortgage portfolio will continue to grow, albeit at an ever slower rate. Sentiment among housing construction firms at alltime low Housing construction sector confidence indicator Source: Thomson Reuters Datastream Housing construction sector slows to snail's pace The malaise in the housing market is reflected in the housing construction sector. The level of activity has declined sharply and there is no sign of an improvement in the short term. An indicator of this is the value of architects' current projects. In the first half of 2012, this stood at less than one-third of the 2007 level. Suppliers in the timber and building materials industry are also faced with declining orders as a result of an exceptionally low capacity utilisation level. Sentiment in these sectors has fallen to an all-time low. Firms specialised in housing construction only have work for 5¼ months, compared with 6½ months a year ago. The number of bankruptcies is rising and employment in the industry is decreasing. In light of this, it is hardly surprising that fewer planning permissions are being applied for and granted. According to BouwKennis, the number of dwellings completed will fall in the coming years to a level of around 41,000 in If the number of dwellings completed is around 41,000, the shortages in the housing market will continue. On the basis of demographic forecasts, the government estimates that 80,000 dwellings must be built each year. As the number actually built will fall far short of this, house prices should bottom out. Indeed, some people believe that prices may even soon start to rise again. However, this is unlikely if only because the housing shortage is a parameter that is hard to calculate. The number of households is not fixed. The decision to form a household often depends on the level of housing expenditure. Housing consumption will fall if structural reforms lead to higher housing expenditure. Young people will continue living with their parents longer, and those of limited means will be more inclined to establish a joint household. In addition, households faced with higher housing expenditure will tend to make do with lower quality accommodation. Refurbished office buildings could meet the need for cheap dwellings in the fairly near future. The notion that prices will bottom out because of the continuing housing shortage should therefore not be taken too literally. Market for owner-occupied homes still far from healthy We are assuming that after next year, affordability will be close to the long-term average. In the period after 2013, further price adjustments will take place mainly through inflation. However, this will not yet mark the end of the crisis in the housing market. Prices are not the best indicator of the market's health. For each sale in a market with rising prices there is also a purchase at a higher price. Conversely, each sale in a falling market is counterbalanced by a purchase at a lower price. The price level therefore cuts two ways. The basic aim of a homeowner is a situation in which the dwelling can be sold at any given moment at a price that corresponds to its underlying value. In view of this, the soundness of the housing market is better reflected in the liquidity of the market than in price levels. The transaction volume is the best indicator of liquidity. The average number of transactions involving existing properties was 192,000 in the period Since then it has declined to 127,000 transactions. Assuming that a 'healthy' transaction volume is somewhere between these two extremes say, 160,000 the Dutch market has a long way to go. Housing market estimates for 2013 unchanged In light of the measures in the Spring Agreement, the lack of opportunities for first-time buyers to get on the housing ladder from 1 January 2013 will lead to a decline in the number of transactions and a sharp fall in prices. The Group Economics Department of ABN AMRO is allowing for a decline in the number of transactions from 115,000 in 2012 to 100,000 in We are estimating an 8% fall in prices in 2013, following

9 9 Housing Market Monitor - 2 November 2012 a fall of 6% in After this substantial downward adjustment, affordability will once again be at its long-term average. It is therefore very likely that by 2014 the price adjustment process will have been largely completed. Nonetheless, this does not mean that the number of transactions will quickly pick up again after Households in negative equity are often young people who have bought a house in the past 10 years. In many cases they have an interest-only mortgage and still have few resources to offset the residual debt. Therefore, this group cannot move house for the time being, despite the temporary possibility of tax relief on the residual debt. As a result, few properties in the category suitable for first-time buyers will come on to the market. And without first-time buyers and people moving up the property ladder, liquidity will remain limited. Housing market estimates House prices -2¼% -6% -8% Number of transactions 121, , ,000

10 10 Housing Market Monitor - 2 November 2012 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 2012 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO)