Dutch residential mortgage risks unevenly distributed
Although on average, prices of Dutch residential properties are considerably above the corresponding mortgage loans, there are large differences between individual households. Whereas the net wealth of senior citizens tends to be considerable, the financial position of many young homeowners is rather vulnerable. The equity on their home is often negative whereas they have little if any savings.
For households, the home tends to be the main source of both wealth and indebtedness. The debts have recently been increasing: in mid-2011, overall mortgage indebtedness ran to EUR 644 billion. Offsetting this sum is over EUR 1100 billion in home property value. The average homeowner therefore enjoys a considerable net equity on his home: over 40% of the current market value.
However, the decline in house prices of recent years has reduced the debt-to-wealth ratio. In principle, this trend affects all homeowners in the same way: as the price of the home comes down, the equity is eroded. A matter for concern are the large differences in households’ starting positions. Especially the younger households tend to have only little equity, whereas many older people enjoy robust buffers (Chart 1).
The difference can be largely attributed to the development of house prices over the past decades. Between 1984 and 2008, house prices rose both steadily and strongly. Dutch homeowners who bought their houses long ago, have quietly accumulated considerable home equity. From 2008, house prices have turned around, however, resulting in the reverse effect. Households who bought their homes at the peak of the market tend to hold considerably larger mortgage debts than the associated real estate is worth. This effect is exacerbated by the unfavourable starting position of many Dutch who take out their first mortgage loan. In many cases, the amount borrowed exceeds the home’s value on the free market, and thus many first-time buyers start out with negative home equities.
Notably, households facing low home equity also tend to have accumulated relatively little savings to pay back the loan. This is mainly explained by the simple fact that from the moment they bought their home, they have not had much time to save money. These developments have narrowed the scope these homeowners have to absorb setbacks such as unemployment. Chart 2 illustrates this with a fictitious but realistic example. The chart shows amounts of current home equity and the corresponding savings balances, depending on the year the home was bought and the associated mortgage loan was taken out. The chart assumes that the mortgage loan at buying time amounts to 112% of the property value and that half the principal is paid back when the loan matures, while the property value has meanwhile developed in line with the Dutch house price average.
The chart clearly shows that homeowners who bought their property a long time ago have meanwhile accumulated considerable net wealth. They have equity as well as savings. At the same time, especially those households who bought their home during the past five years are facing negative net wealth positions. Such households are vulnerable, because selling their home will leave them holding a residual debt. If the sale of the home is forced because of mortgage payment arrears, the risk of net debt is even larger, because the property will fetch a lower price than if it were sold on the free market.
The actual vulnerability of recent first-time buyers may turn out even more acute than is suggested by the above analysis. In the 1998–2007 period, more than half of all newly sold asset-backed mortgage products were investment-backed loans (note 1). The returns on such products depend, of course, on the type of investment selected. Given the development of the stock markets over the past decade, however, the realised returns on many such policies are likely to have been below those on savings-based loans.
Moreover, one cannot assume that every homebuyer intends to redeem 50 per cent of their loan. There will be individual differences, with some borrowers saving more and others less. Conversely, the above analysis also disregards households’ financial buffers that are not linked to their home, such as investments or unencumbered savings. Counting these factors in is unlikely to make much difference, however: it is especially the older cohorts who have such buffers, whereas the young tend to have far less freely disposable wealth.
Note 1: Model simulation based on a mortgage loan for 112% of the purchasing price, a projected 50% redemption after 30 years and home property value development linked to the Dutch house price index. S ource: Statistics Netherlands CBS, BIS , DNB calculations.
