The fall of the cabinet presents a period of uncertainty for the future of the Dutch housing market, with significant policy changes hanging in the balance. In the meantime, transactions of newly built homes are down 53% YoY. This decline in sales occurred alongside an increase in prices of newly built homes, making them less attractive compared to existing homes and potentially impacting new housing projects. On the other hand, the market has shown its resilience with a modest increase in housing prices in June 2023 compared to the previous month.

Download the full Dynamic Credit Quarterly Update 2023-Q2 or sign up to receive the next update by e-mail.

Possible consequences for the Dutch housing market due to the fallen Rutte IV cabinet

The incumbent cabinet will act in a caretaker capacity with limited powers and will be responsible for facilitating elections and managing ongoing affairs, while avoiding controversial legislation. It is likely that this will impact the implementation of new housing market regulations. One of the policies that is still expected to be implemented is the property’s energy label as a factor in loan affordability assessments.

Newly built homes less attractive compared to existing homes

In the last quarter, transactions of new-build homes in the Netherlands decreased to 53% compared to the same quarter in the previous year, representing the lowest number of transactions of newly-built homes (3,300) in a quarter since the start of measurement in 2015. At the same time, the prices of existing homes were lower than a year earlier with an average sale price of EUR 417,000. In contrast, the average sale price for new-build homes in the same period was EUR 504,000, making newly-built homes less attractive compared to existing homes and thereby depressing demand.

As a result, concerns occur that this would reduce future supply. As construction companies typically begin building when at least 70% of the prospective homes are sold, this decline in sales might discourage new projects. Construction companies have been in discussions with the government on guarantees or subsidies to ensure the continuation of new construction, but it is unclear whether such proposals will be approved under the current caretaker government.

While both supply and demand for newly-built homes are decreasing, the housing shortage has worsened

The housing shortage in the Netherlands has substantially risen within a year, reaching 390,000 in 2023, a notable increase from the previous year’s 315,000. This sharp increase is attributed to the rapid growth of the Dutch population and a lower-than-expected rate of housing construction. The market is not expected to experience any relief from this tightness until around 2028.

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.

House prices declined at the beginning of the quarter, but showed a modest increase in June 2023

Compared to the previous quarter, housing prices have experienced a decline of 1.90% and 5.20% compared to the same quarter last year. During the first half of 2023, housing prices have been decreasing, however they increased in June 2023 with 0.20%. When comparing house prices as measured in 2013, when they were at its lowest after the great financial crisis, with current housing prices, they are up circa 87%. In addition, the last quarter saw a peak-to-trough decrease of approximately 6.13%.

Mortgage rates remained relatively flat and spread changes varied substantially

With changes from -6 bps to +7 bps, mortgage rates have remained relatively flat throughout the quarter. However, rates have increased quarter-to-date, especially from 10-year fixed onwards, due to a steep increase in the swap curve. Spread changes vary substantially: 5-year rate spreads decreased by 28 bps during the quarter and 10-year spreads remained relatively flat. Meanwhile, 20-year and 30-year rate spreads saw slight increases. In the first days of the quarter spreads have increased after a rise and subsequent fall of swap rates.

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.

The significance of climate risks in the housing market is likely to increase in the near future

Climate change poses a growing risk to residential properties, with water damage, drought, heatwaves, and flooding becoming more frequent and severe. These physical climate risks are currently underappreciated in residential real estate valuation due to, amongst others, lack of urgency and knowledge. However, concerns about the physical consequences of climate change may grow rapidly as more extreme weather events and property damage are predicted, making the impact of climate change more evident.

The emergence of standardized methodologies for assessing physical climate risks could change the game and lead to better incorporation into property pricing. By publishing portfolio-specific climate risk reports, Dynamic Credit has already taken a first step towards sharing insights about climate risks and bridging the knowledge gap.

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.