Capital market interest rates and, in their wake, mortgage rates have risen sharply since the publication of our September Dutch Housing Market Quarterly.
Those looking for a new mortgage now pay about 3.0 to 3.5 percentage points more interest than at the beginning of the year. This means a drop in borrowing power for home buyers (see Figure 1) and results in substantially higher monthly costs (see Figure 2). As this has a significant impact on demand for owner-occupied homes, we have downwardly revised our expectations for house prices and home sales. For 2023, we now assume that house prices will be 3.1% lower on average than this year, and in 2024 they will fall by another 2.0%. Of course, this is highly dependent on the further development of interest rates. If interest rates remain high for longer than expected, prices will likely fall more.
The number of sales is expected to decline slightly in the coming years. Homeowners have gained a lot of surplus value, because they are paying off their mortgages more often and because house prices have risen sharply in recent years. As a result, they are more flexible in their pricing. They will be more inclined to settle for a lower sales price, which – in contrast to the 2008-2013 housing market crisis – allows them to reach an agreement with a buyer more quickly. The number of house sales will therefore fall slightly to 179,000 next year, according to our estimates, and will recover to 184,000 in 2024.
Figure 1: Interest rates climb; mortgages drop
Figure 2: Mortgages a third more expensive than at the beginning of this year
Knock-on effects of interest rate seen faster than expected
In addition to the stronger-than-expected rise in interest rates, we are also updating our prognoses because the interest rate rise seems to feed through to the housing market faster than we had anticipated. In our September forecast, we assumed that house prices would fall late this year/early next year. This was expected to be visible in the spring of 2023 in the official housing market statistics from Statistics Netherlands (CBS) and the Dutch Land Registry (Kadaster). Their figures are based on the moment of key handover, usually about three to four months after purchase contracts are signed. Now it appears that this decline has already begun in recent months (see Figure 3). Recent figures (only in Dutch) from broker association NVM also indicate that the decline in the house price index published by Statistics Netherlands will continue in the coming months. According to the broker association, houses for which a provisional purchase agreement was signed in Q3 (most of which have not had a key handover yet) also sold for a lower price.
Figure 3: House prices are falling
Prices expected to decline 3.1% in 2023, 2.0% in 2024
We expect house prices to fall on a quarterly basis from Q4 (see Figure 4). On average, they are still expected to be 13.7% higher in all of 2022 than the average price level in 2021. Note that this figure is high because of so-called ‘spillover’ from 2021, when prices skyrocketed. Moreover, house prices also continued to increase in the first half of this year, so they are still expected to be 5.4% higher in the last quarter of this year – despite the incipient drop in prices – than in Q4 2021.
Figure 4: House prices are falling due to sharply rising interest rates
For 2023, in our base scenario, we expect the average price level to be 3.1% lower than in 2022, followed by a further 2.0% decline in 2024. As a result, we estimate that house prices in the last quarter of that year will be 7.4% below the level of Q3 2022. This is roughly equivalent to the price level in Q4 2021.
Alternative interest rate scenarios
As we wrote before, the near future of the owner-occupied housing market depends heavily on the development of interest rates (see Figure 4). We’ve made two scenarios in addition to our baseline. In the first capital market interest rates are one percentage point lower, in the second one percentage point higher than the interest rate path in the base scenario. The base scenario is derived from RaboResearch’s most recent mid-October interest rate estimate. In this scenario, the ten-year euro swap rate will peak around 3.2% in Q4 of this year, before falling relatively quickly to around 2.5% from the second half of 2023. In recent decades, mortgage interest rates on new contracts have averaged 1.0% to 1.5% higher than the swap rates.
In the lower interest rate scenario, the decline in swap rates continues more strongly in 2023, remaining around 1.5% from Q2 2023. This scenario could occur, for example, when inflation expectations decline faster than expected – for example due to a sudden peace between Russia and Ukraine – and the European Central Bank should decide to raise the policy rate less sharply. With interest rates falling faster again, house prices in this scenario will fall by 2.8% in 2023 and by only 0.7% in 2024. In that case, prices at the end of 2024 are expected to be not 7.4% but 5.4% lower than in Q3 2022.
In the higher interest rate scenario, capital market interest rates do not peak at 3.7% until Q2 2023, while remaining at higher levels for an extended period of time. In this case, house prices are expected to fall by 3.5% in 2023, followed by another 3.2% in 2024. In this scenario, house prices at the end of 2024 will be 9.4% lower than in the summer of 2022.
Fewer sales in the coming years as market cools off
Typically, the number of home sales declines during the recession phase of the housing market cycle. This time, too, we expect no exception. Last year, the number of transactions decreased mainly due to a lack of supply. But for the coming years, we expect the number of home sales to decrease as buyers drop out. Although many are still looking for a home for sale within their financial means, due to the increased mortgage interest rates, much of the supply is simply no longer within financial reach at current prices.
This year, the number of transactions of existing owner-occupied homes is therefore expected to reach 188,000, nearly 17% less than in 2021. For 2023, we expect 179,000 sales, another almost 5% decrease. This is a substantial downward revision compared to our September estimate, when we still assumed 197,000 transactions for 2023. In our previous estimate, we still assumed that the market would absorb the additional supply on account of the large housing shortage, despite increased interest rates. But now that interest rates have risen much further in a short period of time, we assume that it will take some time for prices to fall sufficiently to be able to sell the extra supply.
As capital market interest rates in our base scenario will be lower in the second half of 2023 than they are today, and since prices of owner-occupied homes will have fallen slightly, we expect the number of sales to recover cautiously from 2024 onward. We foresee 184,000 transactions in that year. In a scenario in which capital market interest rates rise further and remain high for longer, the number of transactions in 2023 and 2024 is likely to be lower. In that case, the number of home sales is not expected to recover until after 2024.
In addition to mortgage interest rates, sentiment among potential home buyers and employment trends also play an important role in the demand for owner-occupied housing. For example, falling house prices can have a multiplier effect, where the expectation of falling house prices causes a further decline in prices. In addition, the housing market will cool down further if unemployment rises more than expected. Our current estimate assumes a mild recession and a slight increase in unemployment.
Figure 5: Fewer sales despite more supply
Sales decline expected to be smaller than in 2008-2013
Although we expect fewer transactions in the coming years, the drop in sales that we currently anticipate is more modest than what we saw in the aftermath of the financial crisis. At the time the number of sales fell from more than 200,000 to just over 110,000 existing owner-occupied homes. In the two years prior to the most recent peak, houses have increased in value by more than 33%. As a result, most homeowners remain ‘above water’ and have (a lot of) surplus value, even if prices fall.
In addition, mortgage standards are stricter today and new home buyers typically pay off their mortgages. In the two years preceding the 2008 peak, things were very different: most new homebuyers already started out ‘under water,’ because they often took out mortgages of more than 100% of their home’s value, they often had interest-only mortgages, and because prices had only risen by 7.5% in the two years prior to 2008. A drop in prices thus quickly pushed many homeowners (even further) under water.
Now that homeowners have more home equity, they may be more likely to accept a lower sales price than homeowners between 2008 and 2013. Because of this greater flexibility, we believe the number of sales will fall less than it did in the wake of the financial crisis. In addition, new construction has lagged far behind housing needs in recent years. There is high latent demand from first-time buyers and from people who want to move, but who have repeatedly missed out in recent years due to lack of supply. According to NVM, in the past two quarters many more homes have been put up for sale: Q2 saw 42% (in Dutch only) more than a year earlier and Q4 recorded a 24% (in Dutch only) increase. We assume that this extra supply will enable more transactions in the longer term. On the other hand, new construction production is likely to fall, because the combination of high construction costs and lower sales revenues puts construction projects under pressure.