Housing Market Monitor

Transcription

1 Housing Market Monitor Strict regime keeps prices in check Group Economics Philip Bokeloh December 2014 Economic recovery and lower interest rates are driving the recovery of the housing market Pent-up demand, expanded gift tax exemption and first-time buyer loan scheme are providing temporary extra support Tighter mortgage criteria will restrain future price increases What is the current situation in the housing market? A strong recovery is under way in the housing market, with prices finally rising again after five years of decline. In November, the Statistics Netherlands/Land Registry price index for existing housing was 2.4% higher than in the same month a year ago, marking the eighth consecutive month in which the price index increased. Barring a dramatic end-ofyear downturn, the average price increase in 2014 looks set to work out at 1% - a clear uplift compared to the 6.6% slump in Encouragingly, the price increase is also broadly based. Apart from Groningen, Friesland and Zeeland, all provinces saw prices strengthen. And the upward momentum is building across the full spectrum of house types, albeit that apartments, terraced housing and end-of-terrace properties are rebounding more vigorously than semi-detached and detached homes. Figures of Calcasa confirm this picture. According to their calculations, home values are rising in 90% of the 12,000 neighbourhoods, with low price categories accelerating faster in value than the more expensive categories. Sales are also clearly picking up. In the eleven months until end of November, 128,000 transactions were concluded. Taking account of the traditional buying spurt at the end of the year, the number of transactions in 2014 may well exceed 145,000 homes, 35,000 more than in Intensified activity is also visible in the new-build segment. According to the NVB (Association for Developers and Construction Firms), over 18,000 new-build homes were sold in the first ten months of the year, 6,000 more than in the same period last year. Construction firms are in a more optimistic mood. They have more work on their hands and their order books are filling up. In line with the price increases, the upturn in house sales is also taking place across a broad front. In geographical terms, sales are growing robustly in all provinces, though the biggest surge can be seen in the Randstad conurbation. Cities with strong economic dynamics, like Amsterdam and Utrecht, are witnessing a particularly sharp uplift in the number of transactions. Moreover, all house types are finding favour with buyers. In the third quarter, sales of apartments, terraced housing and detached homes jumped almost 40%. Semidetached and end-of-terrace housing also did well, advancing almost 30%. Evidently, therefore, sales of higher-priced housing are picking up. Alongside the actual sales of more expensive house types, this is also noticeable in the sales shares of the higher price categories. While the share of houses up to EUR 100,000 is shrinking, that of housing above EUR 300,000 is expanding. A shift towards more expensive housing can also be seen in the price segment between these two categories. The growing shares of more expensive houses point to renewed mobility in the housing market, despite 1.5 million homeowners still being under water. Sales share of higher price categories is rising Source: Land Registry % of total sales Below EUR Above EUR Nor is the reduced support for first-time buyers proving to be an insurmountable obstacle for the mobility in the market. A Land Registry study shows that first-time buyers are increasingly moving into new-build housing or into properties of people who are stepping off the property ladder. 1 Only one in three first-time buyers opt to buy from homeowners who are moving up the property ladder. In 2005 the ratio was still two in three. As the entry of first-time buyers on balance generates fewer second-step home purchases, the housing chain is shorter than previously thought. Is it already a seller s market? No, we have not reached that stage yet. The sharp rise in the number of transactions has yet to lead to a substantial decline in the for-sale housing stock. One reason for this is that 1 Marwijk, R. van, (2014) Starters op de koopwoningmarkt, Land Registry

2 homeowners who are eager to move see the improving market as a good opportunity to put their house on the market. In addition, hard-to-sell properties are remaining in the for-sale stock for longer. According to the Dutch Association of Real Estate Brokers (NVM), the number of withdrawals from the market has even decreased to the lowest level since Numbering over 207,000 properties, the for-sale housing stock is still just as large as at the start of the year. However, one thing is certain: with the current transaction volume, the existing for-sale housing stock will take less time to sell. The theoretical selling time is now seventeen months, five months shorter than in January. Properties are not just changing hands faster in theory, but in practice too. According to the NVM, properties sold in the third quarter had been on the market for an average of 122 days versus 133 days in the previous quarter. Even so, the average duration of the existing for-sale stock is still 395 days, which is very long. The main cause is the large number of hard-to-sell properties. Homes that have recently been put on the market soon find a new owner. Almost half of these properties are sold within six months. But the chance of a sale is much smaller for houses that have been on the market for a longer period of time. According to Calcasa, 65,000 properties have now been up for sale for longer than three years. Properties take longer to sell if the asking price is too high. The average price of the for-sale stock is currently EUR 297,000, a figure that is somewhat inflated by the relatively large number of expensive homes in the for-sale stock. The asking price is thus EUR 72,000 above the current average transaction price. Previously, the difference was EUR 6,000 higher. The narrowing gap is mainly attributable to the higher transaction prices, because the average asking price has remained more or less level since January. This stabilisation of the asking price corresponds with the NVM report that fewer sellers are reducing their prices. Very gradually, the balance of power is shifting from buyers to sellers, though the former still retains the upper hand. NVM figures underline this. The difference between the last asking price and the transaction price is now less than 5%, which is better than at the start of 2013, when the difference was still almost 7%, but less good compared to the period before 2009 when the difference was only 3½%. Is the recovery noticeable in the mortgage market? Definitely. The number of mortgage completions is rising strongly, with over 211,000 mortgage deals being concluded in the twelve months until the end of November. In November 2013 the comparable total figure was still 176,000. Moreover, the average mortgage sum of these contracts has increased slightly from an average of EUR 245,000 in November 2013 to an average of EUR 247,000 in November The growing number of contracts and the higher average mortgage sum have boosted mortgage origination to EUR 46bn. In the twelve months until the end of November 2013, mortgage origination was still only EUR 39bn. The growth in mortgage origination is also reflected in the applications for mortgage quotes at Hypotheek Data Netwerk (HDN), an organisation whose members include most mortgage lenders. Until the end of November 2014, HDN recorded more than 195,000 applications, over 60,000 more than in the previous year. Mortgage origination shows slight growth Source: Land Registry EUR bn Mortgage origination The majority of these applications concerns annuity mortgages. Since 2013, mortgage interest relief is only available for new mortgages with an annuity or straight-line repayment schedule. As a result, the annuity share has risen dramatically from zero to no less than 70%. The obligation to make repayments entails that newly issued mortgages carry less risk. The credit risk is also being curtailed by the fact that home buyers are less interested in mortgages with an LTV (Loan-to- Value) above 100% and are more inclined to make down payments on their home. The mortgage quotes at HDN indicate that the LTV ratio has fallen to less than 90%. The preference for longer fixed-rate periods is also growing cautiously, which makes new mortgage contracts less sensitive to interest rate fluctuations. Against this, the loan-to-income ratio is starting to rise again. At the start of 2013 the ratio was still four times income, but the most recent reports now put the ratio at 4.5 times income. Another development is the diminishing proportion of mortgages with a National Mortgage Guarantee (NHG). At the end of 2012, three in four transactions for existing homes were NHG-guaranteed. The figure is now almost one in two. The decline is mainly due to the successive reductions of the NHG

3 limit, so that the number of properties eligible for the NHG is steadily contracting. Despite the higher mortgage origination volume, the outstanding mortgage debt is shrinking. The total mortgage debt amounted to EUR 660bn in June, EUR 8bn lower than a year earlier. The fall was driven by a stronger tendency to make mortgage repayments (in order to solve negative equity problems), the low savings interest rates and the temporary expansion of the gift exemption. According to the Dutch Central Bank (DNB), voluntary mortgage repayments totalled almost EUR 7bn in the first three quarters of Where is the renewed confidence coming from? Confidence in the housing market has rallied strongly. Since the dip in December 2012, the confidence indicator of the Homeowners Association (VEH) has risen steadily. In November the indicator reached a value of 105, the highest reading since the data series started in Even so, people remain wary. A small majority of the surveyed households still prefer to rent a stark contrast with the pre-recession period when an ample majority preferred to buy. Households still show slight preference to rent % respondents (average past 12 months) Prefer to rent Source: Homeowners Association (VEH) Prefer to buy The renewed confidence in the housing market is attributable to a mix of factors. First of all, there is more certainty about the tax regime for owner-occupiers. Another factor is that current price levels are much more attractive for would-be buyers. The combination of lower house values and lower interest rates has made owner-occupied housing much more affordable. Net housing costs excluding repayments as a proportion of net income are historically low. Buying is also gaining lustre compared to renting. Both in 2013 and in 2014, the average rent increase was 4% in the regulated rental segment. According to calculations of the International Monetary Fund, the difference between the costs of buying and renting is near the long-term average. To what extent is the economy helping? The housing market is receiving a further stimulus from the economic upturn. After two years of contraction, the economy is expanding again, albeit modestly. Economic growth is no longer dependent on foreign trade. Business investments are also contributing. Thanks to their improved profitability and better financial position, entrepreneurs are regaining confidence. Accelerating industrial production is going hand in hand with higher capacity utilisation rates, which is acting as a spur on investments. Higher business investments are good for the labour market. The number of temporary employment hours is rising, as is the number of vacancies. And despite job losses in the public sector, both redundancy applications and unemployment are decreasing. However the jobless number is only falling slowly, because the brightening climate is prompting more people to return to the labour market. The improved chances of finding work is underpinning consumer confidence. Despite the international tensions, confidence is greater than at the start of the year. A further factor is that the government will impose fewer tax increases than in previous years, which will bolster disposable incomes. The need for higher taxes is less acute now that the government is no longer on the penalty bench of the European Commission. Thanks to the radical public finance adjustments, the public balance and public debt are now more in line with the Brussels-imposed criteria. The European policymakers also consider the risks in the financial sector to be acceptable. All Dutch banks passed the stress test that the European Central Bank (ECB) carried out this year. Furthermore, disposable incomes are being buoyed up by low inflation. This has fallen to less than half a per cent, mainly due to weak spending. Falling commodity prices are also a factor. At the end of 2014 a barrel of Brent oil cost USD 60, a far cry from the start of 2014 when the price was USD 55 higher. The depressed commodity prices are strengthening purchasing power and encouraging spending. What role do interest rates play? Extremely low interest rates are also driving the recovery of the housing market. The Dutch government is paying less than 1% on ten-year bonds, which is not even half the rate at the start of In line with the government s interest rate, the banks funding costs have also decreased. One important benchmark for this is the swap rate. The swap rates have decreased across the entire term spectrum. The interest rate decline is partly attributable to the inflation rate, which has sunk to a historically low level. Eurozone inflation is now less than half a per cent, well below the ECB target level of 2%. Due to the persistent weak inflation, more and more people are expecting a moderate price development

4 in the future. This is worrying the ECB, as it brings the threat of deflation ever closer. Faced with the falling inflation outlook, the policymakers in Frankfurt have every reason to resort to further monetary expansion. The ECB has already announced its intention to increase its balance sheet by half to EUR 3,000bn. How it proposes to do this remains unclear, but one measure is certain to be the large-scale purchase of debt paper, including bundles of mortgage-backed loans. This prospect is making investments in mortgage loans more liquid and less risky, hence the ongoing narrowing of the spread on mortgage securitisations. RMBS spreads on five-year loans have now almost halved. Banks can raise cheaper funding Source: Datastream Swap rate curve with terms of 1 to 30 years Average 2007 Average 2011 Jan-14 Dec-14 Apart from the ECB, the good payment discipline in the Netherlands is also responsible for the falling spreads. According to Moody s, the percentage of NHG-guaranteed mortgagors with payment arrears of more than ninety days has decreased from 0.75% in June to 0.72% in September. The credit ratings agency puts the cumulative losses at only 0.11%, which is low compared to other countries. The reasons are the internationally low unemployment and the solid social security net. The lower funding costs for banks translate into reduced mortgage rates. According to DNB, the average interest rate on a ten-year fixed-rate mortgage has fallen in the course of the year by 80 basis points to less than 4%, while the average interest rate on loans with a fixed-rate period up to one year has dropped about 30 basis points to 2.7%. The average rate on new mortgage contracts is now 3.3%, 40 basis points lower than at the start of What is the influence of temporary factors? Temporary factors are playing a key role in the housing market recovery. The ongoing price falls previously prompted many households to postpone their home purchase. According to the Netherlands Housing Survey ( WoON), there were almost 2.2 million households who wanted to move house within two years, 260,000 more than three years before. The publication Wonen in ongewone tijden even referred to a log jam of house-moving plans and this log jam has probably swollen further due to the income-dependent rent increases. Now that prices have resumed the upward path, some households are taking the plunge and fulfilling their long-held wish to move house. This pent-up demand is giving the housing market recovery a temporary extra impulse. Whilst the effect of the pent-up demand is set to continue for some time, the positive impact of the temporary expanded gift tax exemption will soon be over. The expansion of the gift tax exemption from EUR 51,000 to EUR 100,000 as introduced in October 2013 has turned out to be much more popular than anticipated so popular, in fact, that the government is losing too much tax revenue and is unwilling to extend the exemption in The government had estimated that the exemption would be used 20,000 times in the period from October 2013 to December But in September it transpired that the exemption had already been used 50,000 times. Due to the lack of data about the use of the temporary gift tax exemption, it is hard to estimate how many transactions actually resulted from this measure. An added difficulty is that the gifts were partly used to repay debts or finance home improvements. Nevertheless, information from real estate agents and civil-law notaries suggests that until now gifts played a role in some 15% of the transactions, as opposed to 10% of the transactions last year. The number of transactions realised with an exempt gift was thus 11,000 higher than in It is not possible to say, however, whether the expanded gift tax exemption was a decisive factor for these transactions. The First-Time Buyer Loans are also making a temporary contribution to the recovery of the housing market. With these loans, first-time buyers pay no interest and make no repayments during the first three years. In 2013 and 2014 an estimated 13,000 first-time buyers made use of the scheme to take out loans for an average amount of EUR Just over one in five users would probably not have purchased the property without the First-Time Buyer Loan. The scheme thus produced at least 2,600 sales. The actual number is higher, however, because without the First-Time Buyer Loan seven in ten users would have had to postpone their purchase. The chances of the First-Time Buyer Loan Scheme generating many more transactions in the coming years are slim, because the funding pot is almost empty. In 2014 the government raised its contribution to the scheme, making EUR 50m available to stem the crisis in the housing market. As the market is now picking up and the problems are concentrated around moving homeowners rather than first-time buyers, the government sees no need to top up the funding pot. Faced with a lack of national funding, many municipalities are

5 threatening to pull the plug on the First-Time Buyer Loan Scheme. Are there any other obstacles? Alongside the aforementioned temporary factors, the housing market also has other obstacles to overcome: the tax relief for the highest marginal rate will decrease as planned to 51%; the NHG limit will be reduced further in July by EUR 20,000 to EUR 245,000; and, in line with the higher rents, the imputed rental income for owner-occupied properties between EUR 75,000 and EUR 1,040,000 will be raised from 0.7% to 0.75%. In addition, according to the Homeowners Association (VEH) the additional housing costs are set to rise by almost 2% to an average of EUR 712 due to the higher property tax rate and sewage and waste collection levies. Finally, the Minister for Housing and the Central Government Sector, Stef Blok, is going to oblige homeowners to make a minimum contribution to their homeowners association in order to prevent maintenance backlogs and dereliction. The cost increases resulting from these changes are too modest to stand in the way of the recovery. A bigger threat is posed by the more stringent credit conditions. The banks are less reluctant to extend mortgages and are no longer tightening their acceptance criteria. Against this, however, the maximum Loan to Income ratio that they must observe when extending mortgages is lower than before. Added to this, the maximum Loan to Value (LTV) ratio will be reduced annually by 1 percentage point from 103% in 2015 to 100% in What will happen thereafter is unclear. The CPB Netherlands Bureau for Economic Policy Analysis and DNB are working on recommendations for the Financial Stability Committee. This committee, comprising representatives of DNB, the Netherlands Authority for the Financial Markets (AFM) and the Ministry of Finance, must weigh up the pros and cons of a further reduction. The main advantages of a low LTV are less volatile house prices, a lower risk of negative equity when prices fall, less indebtedness and, hence, a more stable financial sector. In the short term, however, an LTV reduction also has disadvantages. For one thing, a lower LTV puts prices under pressure, which makes the negative equity problem even harder to solve. It also forces first-time buyers to save a substantial sum first before buying their first property. And saving is not easy for young households, given the high group pension contributions that they must pay and the absence of an affordable middle segment in the rental market to accommodate this group. A further reduction of the LTV would therefore hardly seem expedient. Moreover, a reduction of the LTV is also less urgent if the risk of payment problems is small. This is the case when households have sufficient income to meet their obligations. One safeguard in this connection is the statutory Loan to Income (LTI) ratio. Minister Stef Blok sets the maximum amount that people with a certain income are allowed to borrow. This is done on the basis of advice from the National Institute for Family Finance Information (Nibud). Previously, the Nibud s mortgage criteria only served as a guideline for banks. Now, however, banks are required to strictly observe these criteria. The stringent nature of the mortgage criteria explains the strong reaction to the Nibud s most recent housing costs-toincome ratio tables for Nibud includes in its calculations the prospect of children, the possible need for informal care and inevitable expenditures in the event of sickness or disability. Due to this more prudent calculation method, less money is left over for housing costs. As a consequence, families are allowed to borrow a lower proportion of their income for their mortgage. Mortgage loan limit is reduced further Source: Nibud Maximum mortgage in EUR based on notional interest rate With income of EUR The size of the maximum mortgage can vary strongly. The calculation depends on a variety of factors, such as the number of income-earning partners and the energy efficiency rating of the home. Another important factor is the fixed-rate period of the mortgage. If the fixed-rate period is longer than ten years, banks are allowed to base their mortgage calculation on the market interest rate. If shorter, they must use the higher notional interest rate. In short, it is impossible to say what the exact implications of the adjustments will be. In order to get some idea of the implications, we have calculated the size of the reduction of the maximum mortgage for the various income groups. Our calculations assume singleincome households and are based on the notional interest rate (as most contracts have a fixed-rate period shorter than ten years). Our calculations indicate a sharp fall in the maximum mortgage for all income groups. The biggest drop more than 30%! concerns households with an income up to EUR 20,000. This group cannot even raise a loan of EUR 50,000, which effectively excludes them from the property market.

6 However, the number of home buyers in this group is already low, so the impact on the owner-occupied segment will remain limited. The mortgage borrowing power of higher incomes above EUR 60,000 will also be significantly constrained. The maximum mortgage that higher incomes are allowed to take out will fall by 5% on average. However, as high-income households typically borrow less than they are allowed to, the maximum mortgage limit is less relevant for this group. The same does not apply to the middle income group between EUR 30,000 and EUR 50,000. These households do tend to borrow the maximum amount. As this is also the largest group, the maximum mortgage limit for this group provides an important measure for the development of the entire market. The downward adjustment for this group, though low compared to the other income groups, is still 2%. Whether the consequences of the adjustments will be as drastic as the adjustments themselves remains to be seen. For instance, more households may now opt for a longer fixed-rate period. In this case, the bank can use the housing cost-toincome ratio based on the actual interest rate rather than on the notional interest rate when determining the maximum mortgage amount. In some cases, this can create room for a slightly higher maximum mortgage amount. The ultimate effect of the adjustment, therefore, is very uncertain. What does this mean for the outlook? We are convinced that the much more stringent credit criteria will temper prices. A recent DNB study shows that the credit conditions have a major impact on house prices. This study attributes no less than half of the price decline over the period to tighter credit conditions. 2 The development of the credit conditions therefore constitutes an important parameter for the way prices will move. expanded gift tax exemption. At best, there may be some additional second-step purchases following the earlier transactions facilitated by these schemes. The number of transactions, too, will be driven by the economic revival, the low interest rates and the renewed confidence. The housing market will manage to consolidate the gains from 2014 in 2015, before returning to more normal conditions in Once the effects of the tighter mortgage criteria have become clear and the economy has settled into a firmer growth path, property prices and transaction volumes will make further advances. Our provisional estimate is a 2% price increase and a 10% rise in the number of transactions. On balance, prices are still developing at a moderate pace, which means that the negative equity problem will not be solved for the time being. The gift tax exemption provides some respite, but will have less effect in 2015 than in 2014, because the government is revoking the temporary expansion of the scheme. One alternative could be to allow homeowners to dip into their pension savings to make extra mortgage repayments. The government is expected to publish the results of an exploratory study into this option towards the end of January. The initial indications are that this adjustment will be difficult to implement. Transaction volume and price estimates Transactions (% y-o-y) Sources: Group Economics Prices (% y-o-y) The substantial lowering of the LTI criteria therefore compels us to revise our price forecasts. Our original price forecast for 2015 was an increase of 2%, but we have now reduced this to 1%. Compared with the decrease in the maximum permitted mortgage based on the notional interest rate, this adjustment is actually quite moderate. The modest effect is related to the expected economic revival because if the labour market improves, disposable incomes will also rise. Further factors are the sharply reduced mortgage rates and the growing confidence in the housing market. We are also reducing our forecasts for the number of transactions. After previously forecasting 5% more transactions in 2015, we now expect a stabilisation. This, in itself, is not a bad result, given that the market is no longer being fuelled by the first-time buyer loan scheme and the 2 Francke, M. (2014) The effect of credit conditions on the Dutch housing market, DNB

7 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 2014 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO)