Rising interest rates have significantly transformed the Dutch mortgage market. The demand for long fixed-rate periods and refinancing has decreased, while portability usage has surged. A substantial interest rate divergence is observed between the most competitive lenders and the largest banks, primarily attributed to reduced price sensitivity among existing homeowners with lower mortgage rates, who are now incentivized to remain with their existing lender and, in case of relocation, to port their mortgage combined with a further advance. Furthermore, house prices have decreased and general consumer confidence, although still negative, has improved during the quarter with consumption still growing.

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Ported mortgages causing interest rate divergence between big banks and other lenders

Portability, where a borrower ports their mortgage loan conditions and rates to a new property instead of taking out a new loan, saw a significant increase due to steeply risen interest rates, with ported loans accounting for 24% of total mortgage volume, up from 0.1% in 2021. Often, ported mortgages are combined with a further advance with the prevailing market rate of the lender. Meanwhile, refinancing has dropped significantly due to the persisting high-interest rate environment.

With the increased usage of portability and further advances, lenders with large back books (i.e. big banks) have been able to increase their rate position compared to other lenders. Despite the higher market rate on the further advance, the blended rate combined with the existing mortgage is often well below the lowest refinancing rate available at a different lender. As such, existing borrowers are less price sensitive now that interest rates have increased, which caused an interest rate divergence between big banks and other lenders from 2022 onwards.

Housing prices dropping, but still high compared to earlier years

The Dutch House Price Index (HPI) shows that housing prices have decreased by 1.60% QoQ and 0.70% YoY in Q1 2023. Despite the declining trend, prices are still up tremendously if you observe a longer timeframe. For example, the housing prices of 2023 are up by approximately 89% when compared to 2013%.

Additionally, property transactions dropped 21% QoQ and 8% YoY. In the full report, we also describe provincial and municipal differences in house price developments.

Expectations for newly built homes, target in jeopardy

The Dutch government’s goal of constructing 900,000 additional newly-built properties before 2030 appears to be in jeopardy. Issued building permits, a leading indicator for new construction in the upcoming years, is declining as a result of the deteriorating business case for property developers caused by factors such as higher interest rates, labor costs and prices of construction materials and decreasing house prices.

Additionally, the high interest rate environment is dampening housing affordability, contributing to a lower demand for newly built homes, also translating to lower sales figures. Combined, these circumstances paint a gloomy picture for the feasibility of the construction target of the government. The proposed ‘doorbouwgarantie’, in which the government partially guarantees completion of property developments or leniency towards building regulations with regards to sustainability, are being investigated as ways to provide some stimulus for property developers.

Residental & buy-to-let high-interest rate environment persists, spreads remain volatile

Mortgage rates and spreads remained relatively stable compared to the tumultuous year 2022. Across all risk classes and fixed rate periods, the average top six most competitive rates decreased by 5 bps in 2023-Q1, yet it increased by about 2% YoY. Moreover, mortgage rate developments differed substantially over fixed rate periods. Mortgage rate volatility going forward primarily depends on ECB policy.

Mortgage spreads have widened by an average of 15 bps QoQ and 18 bps YoY as of 2023-Q1 across all risk classes and fixed rate periods. Similar to mortgage rate movements, spread developments were more pronounced in the shorter fixed rate periods.

Case study: Dutch Mortgages under Solvency II remain interesting asset in capital mix

Not all asset classes are attractive for insurance companies. The Solvency II regulation is strict, and the capital requirements can be stringent. Yet, the capital treatment of Dutch mortgages is relatively lenient, as Dutch mortgages have shown consistent outperformance versus alternatives such as covered bonds and government bonds. We present a case study where we show that, when allocating 10% to Dutch mortgages, insurance companies can expect increased portfolio returns while keeping risk at similar levels.

Macro-economic developments: central policy rates increased, inflation dropping but remains high

The ECB decided to raise policy interest rates by 50 bps to combat projected inflation. While inflation appears to be dropping, largely due to a decrease in energy and motor fuel prices, it is still well above the desired level.

The Dutch economy continues to grow, with a YoY growth of 3.2% in 2022. Unemployment remains relatively low at 3.5%, with a notably high number of unemployed young people (aged 15-24) of 8%. The number of bankruptcies has been steadily declining, with the majority of bankruptcies in the trade, manufacturing and construction sectors.

Sustainability update: New Energy Performance of Buildings Directive (EPBD IV) & carbon emissions dropping

The European Parliament voted in favor of a new ambitious Energy Performance of Buildings Directive (EPBD IV) that aims to enhance the energy efficiency of buildings across the EU to combat climate change and transition to a more sustainable future. EPBD IV has a special focus on energy labels, including the minimum energy label ambition, setting the stage for substantial improvements in the energy performance of buildings.

With the growing consensus that carbon emissions through human activities are the primary cause of climate change, monitoring and mitigating emission levels of investments have become key considerations for responsible investing. Recent data and our own estimations through two different methodologies revealed a decrease of 15-22% in emissions from buildings compared to the previous year, primarily attributed to higher energy prices and mild weather in 2022. It remains uncertain if this decline is sustained when consumer incentives to reduce consumption diminish. Further efforts to make homes more sustainable will be crucial in driving down carbon emissions in the long term.

Disclaimer Dynamic Credit Partners Europe B.V. (‘Dynamic Credit’) is a registered investment company (beleggingsondernemingsvergunning) and a registered financial service provider (financiëel dienstverlener) with the Dutch Authority for the Financial Markets (Autoriteit Financiële Markten). This presentation is intended for informational purposes only and is subject to change without any notice.The information provided is purely of an indicative nature and is not intended as an offer, investment advice, solicitation or recommendation for the purchase or sale of any security or financial instrument. Dynamic Credit may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented herein. Dynamic Credit cannot be held liable for the content of this presentation or any decision made by a third party on the basis of this presentation. Potential investors are advised to consult their independent investment and tax adviser before making an investment decision. An investment involves risks. The value of securities may fluctuate. Past returns are no guarantee for future returns.