1 Housing Market Monitor Housing market recovery continues Group Economics Philip Bokeloh Madeline Buijs October 2014 Improving housing market: greater confidence, more transactions and higher prices Despite growth in mortgage origination, outstanding mortgage debt is falling due to increased repayments Government is maintaining calm in the market by adhering to previously agreed pace of reform Home buying is back! The situation in the Dutch housing market is clearly on the mend. Interest among prospective buyers is growing now that homeowners have more certainty about the government s housing market policy and can benefit from sharply lower mortgage rates. Meanwhile, substantial rent increases are making the rental segment less attractive, while temporary incentives such as the expanded gift tax exemption are giving an extra impulse to the demand for owner-occupied housing. The revived interest is reflected in the higher number of transactions, and prices are also on the up. According to ABN AMRO, a further recovery of the housing market is likely next year. But only if the wider economic recovery takes hold and the government s housing market policy includes no unpleasant surprises. As regards the first condition, we think that economic growth will be slightly higher in 2015 compared to this year. The second condition is surrounded by greater uncertainty. The housing market measures announced on Budget Day will not hamper the recovery, but the outcomes of the tax reform negotiations and their impact on the housing market are still uncertain. Confidence is growing The Dutch are regaining confidence in the housing market. The Market Indicator of the Homeowners Association (VEH) has been climbing for 21 months in a row, reaching in September its highest level since the start of the series in April Households are clearly more confident about future price trends. In September 2014, a majority of 53% expected prices to rise, as opposed to only 17% in September One confidence-bolstering factor is the greater affordability of housing. The Calcasa indicator, which compares net housing costs against net income, is a good measure in this respect. This indicator is now at its lowest level since the series started, signalling that owner-occupied properties are currently very affordable. The improvement is mainly due to the sharp fall in mortgage interest rates, which was aided by the extremely low capital market rates and the ECB s interest rate policy. Another reason is the significantly lower house prices. Note, however, that the Calcasa calculation of net housing costs does not consider mortgage repayments. As interest-only mortgages have fallen out of favour, actual housing costs are higher than the amount calculated by Calcasa. Rising number of transactions Buyers are flocking back into the housing market. In the first eight months of this year, just under 90,000 existing homes changed hands, almost 40% more than in This is also the highest number of transactions for the first eight months since the onset of the economic crisis. New-build sales are on the rise as well, with over 12,000 new-build homes sold in the first seven months of That is 50% more than in the same period of 2013, but still less than in the years preceding More affordable housing thanks to low interest rates Source: Calcasa Net housing costs as % of net income Affordability indicator Zooming further into the market for existing houses, we see that the transaction recovery is broadly-based. All types of housing are benefiting, though the number of transactions involving terraced houses (excluding end-of-terrace properties) and detached houses showed the strongest growth in the past year. While the market is improving in all provinces, the acceleration in the number of transactions is particularly strong in the regions and cities with robust economic dynamics. The improvement is also in evidence across all price categories, though the most salient rise can be seen in the more expensive segments, which suffered the most from the crisis. This is an initial indication of growing upward mobility in the property market. Further support for this assumption is provided by the slight growth in the share of the age category in the total number of transactions and in the cautious fall in the share of the under-25 category.
2 2 Housing Market Monitor - 8 October 2014 Though more houses are being offered for sale, the stock of houses on the market is shrinking. In August, the total number of houses for sale was 207,000, which is 21,000 less than in the same month a year ago. Clearly, the number of houses being sold is greater than the number of houses being put on the market. Given the current transaction volume, it would theoretically take eighteen months before the entire stock of houses for sale has changed owners. That is seven months shorter than in August last year. Selling times are shortest in the provinces of Utrecht, Noord-Holland and Zuid-Holland and longest in Drenthe, Groningen and Friesland. However, the selling times of individual properties can vary widely: according to Calcasa, 60,000 houses have been on the market for more than three years. Prices are rising If the asking price is attractive, the property is usually sold faster and ultimately often for a higher price. The average asking price in August was EUR 297,000, down EUR 4,000 on the same month a year earlier. As the average selling price has meanwhile risen by EUR 10,000 to EUR 225,000, the difference between the average asking and selling price has narrowed markedly since August last year. This convergence is making it easier for buyers and sellers to reach agreement. Though the average asking price is falling, the average price level is rising. Since hitting a low in June 2013, the CBS/Land Registry Index for existing homes has risen by more than 3%. The price level is now 19% instead of 21% below the peak of August The price index is currently at the May 2003 level. In line with the number of transactions, the best price performance is witnessed in the most economically dynamic regions: the Randstad conurbation is leading the way, while the provinces of Groningen, Drenthe and Zeeland are lagging somewhat behind. The housing associations are dampening the price increase to some extent. Traditionally, housing associations sell a small portion of their housing stock every year. Due to the slump in the housing market, the share of housing associations in total sales has increased and stood at 12% of the transactions in As the total number of transactions is rising, this percentage will probably fall again. Housing association properties are often put on the market at a discount. Research by the Amsterdam School of Real Estate shows that prices for housing association properties are, on average, 6.5% lower than going market prices for properties of equivalent quality. The lower price also has a negative effect on transaction prices for nearby homes, but less than might be expected. This is probably because housing association properties fall within the lower price categories and cater to a different market segment than the mainstream owner-occupied segment. Higher mortgage origination The recovery of the housing market is fuelling mortgage origination. According to the Land Registry, 187,000 mortgages were sold in the twelve months until the end of August, 40,000 more than in the twelve months until the end of November 2013 when the market reached a low point. The average mortgage amount is also rising, albeit very cautiously: from EUR 244,000 in the twelve months until the end of November last year to EUR 246,000 in the twelve months until the end of August. Thanks to the price and volume increase, new mortgage lending surged from EUR 32bn to EUR 40bn in this period. Mortgage debt is falling due to repayments EUR bln Outstanding mortgage debt (lhs) Source: Land Registry & Statistics Netherlands Mortgage origination (rhs) The growth in new mortgage lending is also reflected in the number of applications for mortgage quotes at Hypotheek Data Network (HDN), a mortgage organisation whose members include most mortgage lenders. In the first eight months of this year, almost 128,000 mortgage applications were sent via HDN, up 45% compared to last year. The HDN statistics confirm the expanding share of annuity mortgages. Another clear trend is the growing market share of new mortgage lenders funded by insurers and pension funds. They are mainly active in the segment with longer fixed-rate periods and low loan-to-value (LTV) mortgages. A final conclusion from the HDN data is that the popularity of mortgages with an LTV above 100% is diminishing as more buyers are opting to make down payments on their home. In line with the growth in new mortgage lending, the number of guarantees issued by the Homeownership Guarantee Fund (WEW) is also rising. In the period up to the third quarter, more than 83,000 households took out a mortgage with a National Mortgage Guarantee (NHG), up 10% on the same period last year. The total number of outstanding WEW guarantees is now 1,144,000, totalling EUR 171bn. Almost 3,600 households have made use of the guarantee this year, 5% more than in the same period last year. The number of households invoking the NHG guarantee is growing less quickly, but the average paid-out loss compensation remained stable at EUR 39,
3 3 Housing Market Monitor - 8 October 2014 Despite the growing volume of new mortgage lending, the outstanding mortgage debt is shrinking. Data from Statistics Netherlands (CBS) show that outstanding mortgages in June totalled EUR 660bn, down EUR 8bn on June The main explanation is the increase in repayments. Homeowners whose property is under water are making repayments in order to reduce negative equity. In addition, the government has temporarily expanded the gift tax exemption in an effort to encourage mortgage debt reduction. A further factor is that most new mortgages are annuity-based instead of interestonly. Finally, the low savings rates make it more attractive for some homeowners to repay their mortgage loan rather than save, even though this reduces their mortgage tax relief and their financial buffer against setbacks. Pace of reforms remains unchanged The cabinet is continuing to reform the housing market at the agreed pace. On Budget Day it confirmed that mortgage interest relief for the highest tax bracket would be reduced by half a percentage point to 51% on 1 January From that date, the maximum mortgage amount will also be capped at 3% instead of 4% above the collateral value. Finally, with effect from 1 July 2015, the upper limit for the National Mortgage Guarantee will be lowered by EUR 20,000 to EUR 245,000. All these reforms are in line with the previously announced plans. In adhering to the agreed pace of reform, the cabinet is ignoring the recommendation of the European Commission to accelerate the housing market reforms as soon as the economic climate improves sufficiently. Brussels is particularly keen to see a faster restriction of mortgage interest relief. However, the cabinet has not complied with this wish and rightly so, in our view. The recession may be behind us, but GDP growth is still far from robust, and confidence in the housing market remains fragile. Fresh adjustments could easily disturb the newly-gained calm. This is not to say that a faster restriction of mortgage interest relief is definitely off the agenda. An unexpectedly strong upturn in the economy and the housing market could still prompt the cabinet to change its mind. But we do not consider this a high probability. The future of the tax system is less clear. If the cabinet has its way, radical changes are ahead. The aim is to simplify the tax system and cut income tax rates in order to stimulate employment. However, lowering the income tax rates will not be possible unless the government drastically scales back the existing tax benefits. Against this backdrop it is uncertain whether mortgage interest relief, which is the most important tax benefit, can escape further adjustments. Sharp growth in group at risk of residual debt Households in millions and mortgage debt as % of home value No debt or higher Source: Statistics Netherlands The idea of setting up a National Mortgage Institution has not yet been completely abandoned. Evidently, the cabinet is still discussing this option with the European Commission. Last year, plans were announced to set up an institution that would package NHG-guaranteed mortgages and then sell them under government guarantee to investors. This would give foreign investors better access to the Dutch mortgage market and make mortgage funding less sensitive to the whims of the capital market in times of crisis. However, forming such an institution has proven to be more difficult than previously thought: it must comply with European state aid rules and its creation must not result in a higher public debt. Given these start-up obstacles, we doubt whether the National Mortgage Institution will ever become a reality. Several additional measures On Budget Day the cabinet announced a limited number of additional measures aimed at removing specific bottlenecks. One example is the measure to help a large group of homeowners who are having trouble moving up the property ladder. Due to the price decline of the past years, 1.4 million homeowners are facing the risk of residual debt when they sell their homes. The government wants to help this group. To this end, starting next year interest on residual debts will be eligible for tax relief for fifteen instead of ten years. This arrangement, incidentally, is only available for residual debts incurred in the period from 29 October 2012 until the end of The cabinet seeks to encourage mobility in the owneroccupied segment by alleviating the burden of double housing costs. During the crisis, the period during which homeowners were allowed to deduct mortgage interest for both their new and former home was temporarily extended from two to three years. This facility has now been made permanent. It is a sympathetic gesture towards homeowners who are having difficulty selling their property, as it will reduce their costs. However, it may also make this group less inclined to lower their asking price to accelerate the sale of their home.
4 4 Housing Market Monitor - 8 October 2014 Despite all the adjustments, some homeowners are still struggling to move to a more suitable home. In such cases, the only way they can meet their changing housing requirements is by making improvements to their current home. The possibilities for this have been expanded. For instance, from 1 November homeowners are allowed to expand their house by four metres without a permit. The former limit was two and a half metres. The new rules are a precursor of the Planning and Environment Act (Omgevingswet). This new Act will replace twenty-four separate acts and should ultimately lead to lower administrative costs. Homeowners can also benefit a little longer from the temporarily reduced VAT rate on renovations (6% instead of 21%). This reduction was initially to end on 1 January 2015, but has now been extended to the middle of next year in an effort to boost activity in the still-struggling construction industry. A further reason for the measure is to safeguard the quality of the housing stock in difficult economic times. The reduced VAT rate makes it more attractive for homeowners to invest in home maintenance. End of temporarily expanded gift tax exemption The cabinet has decided against a further extension of the temporarily expanded gift tax exemption. Until the end of this year, gifts up to one hundred thousand euros are tax free, on condition that the money is used to buy a home or reduce a mortgage debt. This measure will be withdrawn with effect from next year, which will bring the tax exemption for gifts back down to around EUR 53,000. The measure has proved much more popular than anticipated. The government had originally counted on 20,000 gifts for the period from 1 October 2013 to 31 December 2014, but the tax department has already received around 50,000 tax returns claiming the exemption. Given the great popularity of the measure, various civil society organisations urged the cabinet to extend the expanded exemption. But the cabinet has decided against this, as a further extension might disturb the market. Moreover, the government prefers to use the available financial resources to support specific target groups, such as households with potential residual debt. The cabinet is also sticking to its policy course regarding the rental segment. Income-dependent rent increases are intended to discourage people from living in social housing that is too cheap relative to their income. According to the latest CBS data, average rents are now just over 9% higher than before rent increases were made income-dependent. Social housing in particular has become more expensive. The government is creaming off the higher rental income via the landlord levy, with revenue from the measure rising in the coming year to EUR 1.3bn. Higher rents due to income-dependent adjustments Source: Statistics Netherlands Percentage of annual rent increase As promised, there will be more scope for private investment in housing in the private rental segment. The private sector rental threshold will be frozen for three years to give investors greater certainty and enable the private segment to grow. Furthermore, housing associations must shift their focus towards housing for lower-income households. The financial supervision of the housing associations is also to be tightened up and will be placed under ministerial responsibility. Whether the latter is a wise move remains to be seen. During the evaluation of failing supervision in the healthcare sector, one of the points of criticism concerned the ministry s excessive interference with the healthcare authority. Practice shows that independence is crucial in enabling the supervisor to do an effective job. To build or not to build? The number of orders received by architects to build homes has been on the rise for four successive quarters. The economic barometer survey of the Economic Institute for the Construction Industry confirms that residential orders are increasing. And the rise in the number of new-build permits also points to renewed activity in the residential sector. Nevertheless, the number of new-build completions will not rise significantly in the coming years as the improvement in the aforementioned leading indicators is still too modest. Moreover, given the long average construction time, it will be a while before new-build completions start rising again. Fortunately, however, limited growth in the number of homes need not be a problem, according to the PBL Netherlands Environmental Assessment Agency. The PBL asserts that demand for housing is currently at a peak in the Netherlands, but that this will flag in ten to twenty years time due to the ageing population. Instead of releasing more land for construction, the PBL advocates converting vacant office and retail buildings into residential units and adjusting existing houses to changing needs.
5 5 Housing Market Monitor - 8 October 2014 Forecasts In light of the above developments, we see no reason to make any radical changes to our outlook for the housing market. After a series of bad years, confidence is starting to return. The improved sentiment will boost home sales. Given the higherthan-expected increase in transactions over the first eight months, we have raised our growth forecast for 2014 from 25% to 30%. If the imminent termination of the expanded gift tax exemption triggers an end-of-year rush for properties, this percentage could be even higher. The increase in the number of transactions next year will be less pronounced due to the lower gift tax exemption, the smaller funding pot for first-time buyer home loans and the fact that the pent-up demand has already partly been satisfied. We are counting on an increase of 5%, bringing the number of transactions to around 150,000. That is quite reasonable, though still a long way off the pre-crisis level. It will, in fact, be some time before that level is reached again. Potential residual debt remains a concern, even though the longer tax relief period for interest on residual debts will make people less fearful of moving house. In addition, the ongoing population ageing will also dampen the number of house removals. We are leaving our price forecasts at 1% for this year and 2% for The low interest rates, combined with the cautious economic recovery, underlie this expectation. A much higher price increase is less likely in our opinion. After all, there are still large numbers of properties on the market and the continuing restriction on the maximum mortgage amount will keep prices in check. Given the slow price recovery, it will be a long time before the problem of negative home equity is definitely behind us. Price and transaction estimates Transactions (% yoy) Prices (% yoy) Source: Group Economics
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