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Explanations for rapid recovery of house prices


Higher mortgage rates over the past two years caused house prices to fall temporarily, but now they are rising. How can that be explained?

Published: 06 June 2024

Bouwvakkers plaatsen dakdelen op een woning in aanbouw.

Anyone taking out a new mortgage will have to pay a much higher mortgage rate compared to two years ago. The average interest rate on new mortgages rose from 1.6% to 4.3% between 2022 and 2023, and now stands at around 4%.

Higher mortgage rates mean higher monthly costs for households and limit their borrowing capacity. Typically, this would cause house prices to fall – and that is what happened initially: from July 2022 to May 2023, prices fell by about 6% nationwide. But house prices have been rising again since May 2023 and are even higher now than during the previous peak in 2022, as shown in Figure 1.

Figure 1 - Average house prices have almost doubled since 2014

Average house prices have almost doubled since 2014.

Source: DNB, Statistics Netherlands

In addition, houses are for sale spend less time on the market. Houses are sold within 34 days on average, compared to 42 days a year earlier. And overbidding is again increasingly common. For instance, more than half of all homes sold in the first quarter of 2024 went for above the asking price.

The rapid recovery of the housing market raises the question of why the fall in Dutch house prices was so curtailed and why prices are now rising again. Below we list some of the explanations for this development.

Borrowing capacity remains large

A key explanation is an increase in in households’ ‘financing capacity’.  Financing capacity is the maximum amount of money households can spend on a home. This is mainly determined by how much a household can borrow (borrowing capacity), and that depends in particular on the level of mortgage interest rates and household income. Furthermore, equity from a previous home, savings or a family mortgage (in Dutch) can also be part of the financing capacity.   

If mortgage rates go up, households can borrow less – which means their financing capacity decreases. However, this is offset by the sharp rise in household incomes in recent years. In the first quarter of 2024, collectively negotiated wages rose by 6,6%. The quarter before that, wages rose even faster, by 6.8%. This was the largest collective wage increase in more than 40 years. As a result, household borrowing capacity has remained stable over the past few years (see the last section of Figure 2).

In addition, the financial position of Dutch households has improved, thereby further supporting their financing capacity.  Mortgage debt as a share of disposable income fell on average from 257% to 179% between 2011 and 2023, albeit this is still high. Households also have more savings, according to the DNB data. As a result, they are less sensitive to increases in mortgage rates and can spend more on a home.

Fixed interest rates

Another reason why house prices are recovering relatively quickly is that many Dutch households fixed their mortgage rates for a period of more than 10 years. As a result, a large group of households are still paying the lower mortgage rates.

Since households are in some cases allowed to take the outstanding low-interest rate mortgage for the remaining fixed-rate period when buying a new house, high mortgage interest rates have a delayed effect on the borrowing capacity. Over the past year, households taking out new mortgages have increasingly opted for shorter fixed-interest rate periods or a variable interest rate, in anticipation of lower interest rates. This increases their borrowing capacity, but also entails a risk if low interest rates do not materialise.

Housing shortage

Limited housing supply is a third explanation for rising house prices. Unlike many other markets, higher demand does not lead to increased supply in the Dutch housing market. Additionally, additions to the housing stock through new construction are limited compared to the existing stock of houses.

Despite the government's ambitious construction plans, housing supply is increasing only marginally and the number of newly completed houses remains relatively low. The recently published coalition agreement (in Dutch) aims to add 100,000 new houses every year until 2030. The current government has the same goal, but is unable to achieve it in practice. In 2023, nearly 55,000 permits were issued for newly-build homes. This is 15% less than in 2022 – and for owner-occupied houses, it was 23% less, according to the data from the Statistics Netherlands (in Dutch). These decreases are partly due to high interest rates and construction costs, which make construction projects less profitable.

Finally, research shows that the supply of existing homes in times of rising mortgage rates is also constrained by the so-called 'lock-in effect': households considering selling their home are refraining from doing so because they expect interest costs for a new mortgage to rise. The number of homes for sale in the first quarter of 2024 was 24% lower than a year ago, further drying up the supply of houses. 

Housing affordability has deteriorated further

What does all this mean for someone looking to buy a house now? The housing market is still very difficult for first-time buyers, as they often have little equity and have to borrow (almost) everything. High mortgage rates squeeze their borrowing capacity, while at the same time house prices are high. For them, houses are still poorly affordable.

Figure 2 shows the deterioration of housing affordability since the start of 2013. The widening gap between borrowing capacity and house prices means that the Dutch housing market has become increasingly less affordable for first-time buyers. In other words, the housing affordability problem is persistent in the Netherlands.

Figure 2 - Since 2013, house prices have risen faster than borrowing capacity, eroding affordability for first-time buyers

Since 2013, house prices have risen faster than borrowing capacity, eroding affordability for first-time buyers.

Source: DNB, Statistics Netherlands

Building more houses is needed, as part of a comprehensive package of coherent measures

The problems in the housing market receive a lot of attention in the public debate and its causes are mainly sought in the limited supply. As a solution, the focus is therefore mostly on building more houses. Housing construction is undoubtedly necessary: every newly built house improves accessibility to the housing market. But this is quite a challenge, given the tight labour market – also in construction – and scarcity in terms of physical space and environmental impact. On the supply side, the government can also take various measures not only to build more houses, but also to make optimal use of the existing stock of houses.

Increasing housing supply alone is not enough; certainly not in the short term. A comprehensive package of measures is necessary, targeting both the supply side and the demand side of the housing market. On the demand side, consider reducing tax benefits for homebuyers, such as the mortgage interest deduction and the transfer tax exemption for first-time buyers. As long as buying a house is financially more attractive than renting one, this will increase demand for owner-occupied homes and push up house prices. This also implies that sufficient rental housing must be available.

The housing market from a financial stability perspective

Developments in the housing market are also important for the stability of our financial system. After the onset of the financial crisis in 2008, mortgage debts of Dutch households have reduced due to stricter lending requirements. Banks have also been better capitalized since then, reducing the risks of the housing market to the financial system compared to 2008. As a result, households are also less likely to be “underwater” with lower house prices, although differences between households remain significant (FSR Fall 2022).

At the same time, household debt levels remain high, especially compared to other Euro area countries. There also remains a risk of overvaluation and thus price decreases in the medium term. Falling house prices damage consumer confidence and consumption relatively strongly in the Netherlands and therefore have a negative impact on the Dutch economy. Falling house prices could impact financial stability through mortgage lending by financial institutions. For example, mortgage loans make up 29% of banks' balance sheet total, 20% of which are Dutch mortgages. Therefore, on Jan. 1, 2022 DNB has introduced a measure requiring banks to use a floor for Dutch mortgages when calculating capital requirements with internal models. Due to sustained systemic risks, DNB plans to extend this floor for banks by two years until November 2026. By doing so, DNB ensures that banks remain well protected against the risks of future house price decreases.