Borrowing capacity and house prices

The autumn of 2022 marks a tipping point for the housing market. House prices almost doubled between the previous low point in June 2013 and June 2022, driven mainly by interest rate and income trends (see Chapter 1). Mortgage interest rates fell by about 2 percentage points from 3.7% to 1.7% during that period, partly due to long-term trends such as ageing and globalisation, but also due to the ECB’s interest rate policy.

Dutch people’s average nominal income increased by more than 30% over the same period. More income means households can spend more money on a home and lower interest rates increase the amount they can borrow. In other words, their borrowing capacity increased. As the housing supply in the Netherlands is largely unresponsive to changes in demand over the short and long term, greater borrowing capacity leads to higher house prices. The almost constant rising trend in house prices over the past decade came to an end last August. According to Statistics Netherlands, house prices fell by 4.5% between August last year and February 2023.