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Will Dutch first-time buyers be able to afford a home again?


Published: 03 May 2023

Starters kijken naar woningaanbod

From the autumn of 2023, first-time buyers will find homes slightly more affordable. Although house prices are falling, first-time buyers’ mortgage costs are higher than a year ago as mortgage rates have gone up. Meanwhile, as incomes rise and house prices continue to fall, affordability will improve later this year, according to a new DNB Analysis.

Houses set to be slightly more affordable from mid-2023

Amid falling house prices since autumn 2022 and appreciable wage rises seen in recent months, the position of first-time buyers is set to improve slightly in the coming period. Indeed, as first-time buyers start earning more, they can spend more on a home, which increases their borrowing capacity. Models and calculations prepared by our economists show that these factors will improve the affordability of owner-occupied homes by more than 4% by the end of 2023 relative to the final months of 2021, before interest rates started rising.

Affordability falls first

The fact that first-time buyers did not find it more affordable to purchase a home immediately after house prices started to fall is due to higher mortgage interest rates, which responded rapidly to the rise in capital market interest rates in 2022. This rise in capital market interest rates, which apply to loans with longer maturities, is linked to the increase in the monetary policy rate, which the European Central Bank raised in several steps starting in July 2022 to curb inflation. With mortgage interest rates rising rapidly, first-time buyers could borrow less money to purchase a home at the same monthly cost. House prices fall more gradually than interest rates rise, which meant that the affordability of a home for first-time buyers declined initially in 2022.

House prices fall, but with a lag 

A decline in borrowing capacity means that first-time buyers can spend less money on a home. Our analysis reveals that house prices will subsequently fall steadily, at about the same pace as borrowing capacity. However, house prices fall with a lag. Our calculations show that a 3.5% drop in borrowing capacity will result in a 3.9% decline in house prices over a five-year period. This means that a drop is almost fully reflected in lower prices.

How do house prices react to a rise in mortgage rates? 

Figure 1 (below) is from our Analysis. It clearly shows how borrowing capacity and house prices react to a rise in interest rates. We start a simulation in the fourth quarter of 2021, just before mortgage rates started to rise in the Netherlands. What we observe is that borrowing capacity immediately decreases due to the rise in interest rates, while house prices remain fairly constant for some time. As a result, affordability decreases significantly in the short term, as shown by the dotted line in Figure 1. For the same home, monthly payments in 2022 are significantly higher than at the end of 2021. 

Figure 1: Borrowing capacity, house prices and affordability in a scenario of rising interest rates and rising wages. 

Figure 1: Borrowing capacity, house prices and affordability in a scenario of rising interest rates and rising wages. 

The Y axis shows this development from the end of 2021, the start of the scenario. The chart assumes a scenario in which mortgage rates rise by 2.5 percentage points from early 2022 and wages rise by 3.3%, 5.1% and 4.3% between 2022 and 2024. Note: This is a simulation, not a projection.

Recent times still difficult for first-time buyers 

It is still extremely difficult for first-time buyers to find a suitable home in the Netherlands, in spite of the somewhat more optimistic outlook for next year. The average gross income of a Dutch first-time buyer’s household in 2022 was around €67,500. This means they can borrow up to €312,000 from a bank at the current mortgage rate of 4%. This is far below the average selling price of a home, which stood at €432,000 in 2022. It therefore remains difficult for first-time buyers to get a foothold in the housing market. Research by valuation company Calcasa confirms this: the average first-time buyer can finance only 3.4% of the owner-occupied homes on offer.

Avoid policies that drive up prices, such as widening lending standards and providing tax incentives 

Despite the difficult situation first-time buyers are currently in, it is important not to deploy some well-intentioned support measures. In difficult times it is a natural reaction to provide first-time buyers with financial support, for example by increasing borrowing ratios or providing further tax incentives for home ownership. While this may benefit a small category in the short term, it does not improve the situation of first-time buyers in the longer term, as such measures drive up house prices even further. Previous research by DNB has shown that house prices in the Netherlands depend mainly on how much buyers can borrow. The current Analysis provides a model-based elaboration of this effect, showing that increasing borrowing capacity is ultimately fully reflected in higher prices. Unfortunately, this means that first-time buyers will encounter little or no benefit from financial support measures. A broader approach to the issue is needed.

Read more: 

Analysis: Borrowing capacity and house prices 

In our Analysis “Borrowing capacity and house prices”  our economists examine three perspectives on the relationship between the amount of money buyers can borrow to purchase a house and the development of house prices. Using models, they look back in various scenarios to the moment when mortgage rates began to rise, in spring 2022, and ahead to 2026.  

The current DNBulletin outlines the developments in the housing market affecting first-time buyers which we have observed since the tipping point in autumn 2022 and those we expect in the near future. Of course, the picture we see now is not set in stone – sentiment in the housing market can turn, or wages and interest rates can develop differently than expected.  

The developments described are also noticeable for people who already own a home. Their situation is less clear-cut, since they will not only buy a home at a lower price, but will also most likely sell a house. 

Full details can be found in the Analysis

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