Steep increase of mortgage rates and house prices, further tightening the Dutch housing market.

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The Dutch mortgage market is defined by significant rate increases over the first quarter of 2022. Increases of almost 1.5% are observed year-to-date, leading to deteriorating affordability. Meanwhile, the Minister of Housing and Spatial Planning presents first plans to take on the housing shortage.

Increasing mortgage rates

Mortgage rates increased steeply following higher-than-expected inflation in the fourth quarter and subsequently through 2022-Q1. The increase in swap rates has led to further increases in mortgage rates. While we’ve seen a long period of minor rate changes, weekly changes of 20 to 30 bps are now very common.

The Dutch housing market tightens further

The Dutch House Price Index increased with 4.2% in 2022-Q1 and 20.3% YoY, surpassing the previous YoY record of 19.6% in 2021-Q4.

Affordability deteriorates

With house price and interest rate increases, and the reduction of deductible interest, affordability has dropped significantly in the last quarter. Add increasing inflation and building supply chain disruptions to that mix and it is clear that the distant future remains very uncertain.

“The increase in swap rates has led to further increases in mortgage rates. While we’ve seen a long period of minor rate changes, weekly changes of 20 to 30 bps are now very common.”

Jasper Koops

Minister presents plans to tackle housing shortage

The housing shortage is the largest challenge the newly-installed Minister of Housing and Spatial Planning Hugo de Jonge is facing, specifically for first-time buyers and the elderly. He aims to realize the construction of 1 million new houses by 2030 and to take 1.5 million existing houses off the gas network to only rely on electricity for heating and cooking.

Increasing energy prices result in growing energy poverty

Energy prices have seen large upwards pressure and have been very volatile. Statistics Netherlands (“CBS”) expects households to face an average 86% increase in energy costs in 2022. This translates to an increase of monthly energy payments of about 110 euros on average.

Case study: Dutch mortgages as a risk-adjusted return enhancer

We investigated the impact on the risk/return profile and solvency capital requirement (SCR) for a typical insurance company allocating 10% of investments to Dutch mortgages. We observed that the risk-adjusted return of the investment portfolio improves in all cases, allowing insurance companies to increase the expected portfolio return by swapping low yielding assets for Dutch mortgages while keeping risk at similar levels. Additionally, the base case expected return can be maintained while reducing the overall portfolio risk.

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