Dynamic Credit Dutch Housing Market Update Q4 2023Dynamic Credit Dutch Housing Market Update Q4 2023

Dynamic Credit Dutch Housing Market Update Q4 2023

Jasper Koops - Head of Portfolio ManagementJasper Koops31 January 2024 at 17:00

As swap rates declined and mortgage rates dropped by an average of 31 bps in the last quarter of 2023, financial institutions have revised their housing price projections for 2024 and 2025 to just over a 4.10% annual increase. Meanwhile, uncertainty in the buy-to-let market remains and the formation of a new Dutch cabinet is in full swing. Key decisions in climate and energy policies are needed to achieve climate neutrality by 2050, which are highlighted in an independent report that explores challenges to sustainability.

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Mortgage rates decreased and spreads widened substantially

During the last quarter of 2023, mortgage rates decreased significantly after a long period of increasing interest rates. Rates dropped by an average of 31 bps QoQ and 21 bps YoY across all fixed rate periods and risk classes. The decline was strongest for shorter terms, but the differences between risk classes were small. The trend continued in early 2024, with rates falling an additional 12 bps on average.

Swap rates dropped last quarter due to positive inflation expectations and anticipated interest rate cuts by the European Central Bank. This caused spreads to increase, but mortgage rates took longer to adjust, resulting in wider spreads for a prolonged period. By the end of Q4, spreads were up 60 bps for all fixed rate periods and risk classes. While swap rates didn't decrease further after Q4, they did rise slightly. The delayed response of mortgage rates partially reduced the spread increase in Q4, but spreads remained significantly higher compared to the end of Q3.

Expectations housing market shifted and consumer confidence improved

Housing prices continued to recover in 2023-Q4 from a slump at the end of 2022, with a 1.70% QoQ increase but a 0.60% YoY decrease. December saw a 0.2% MoM increase, the seventh consecutive monthly rise. Financial institutions have released their outlook for the housing market in 2024 and 2025, with expectations improving in 2023-Q4. Housing prices are predicted to increase by 4.13% and 4.17% for 2024 and 2025 respectively, compared to 2.97% predicted in Q3. Furthermore, consumer confidence in the Netherlands increased. Consumers were positive about their financial situation in the next 12 months for the first time since October 2021.

Rental prices increased and uncertainty in the buy-to-let market remains

The national average rental price in the Netherlands increased by 8.50% YoY, reaching a record high of EUR 18.01 per square meter per month, with the five largest cities having the highest rental prices. To regulate the rental market, The Dutch Senate approved a bill to limit the use of temporary rental contracts, making indefinite rental contracts the norm. Also, The Advisory Division of the Council of State (Raad van State) has advised on the Affordable Rent Act (“Wet betaalbare huur”) proposal to expand the regulated rental market by providing affordable housing for middle-income earners (“middenhuur). They conclude that the effectiveness of the proposed legislation remains uncertain and could cause further supply reduction in the unregulated segment.

According to the Advisory Division, the government has not paid sufficient attention to the causes of the shortage or the relationship between social housing, the owner-occupied market, and the unregulated rent market. The proposed expansion carries the risk of a reduction in supply if property owners and investors are no longer willing to invest in the rental market. The government has yet to provide a convincing explanation of how the proposed legislation manages the risk of a shrinking rental market while providing more affordable rental properties.

Sustainability update

An independent working group commissioned by the Ministry of Economic Affairs and Climate drafted a report outlining the challenges and choices facing the new Dutch cabinet in climate and energy policy to achieve climate neutrality by 2050. To achieve the 2030 goals, the report proposes increasing the target for homes with a heat pump to 1.5 million, providing additional support for local initiatives and offering financing options for speed. The new Energy Trade System will cease issuing new emission rights in 2044, leading to a rise in natural gas prices and high costs for households. The report proposes presenting goals for 2040 and 2050 for the built environment during this parliamentary term, such as minimum energy efficiency requirements or the obligation to make a home more sustainable after a transaction.

A new sustainability section for commercial and business real estate appraisals is introduced, explicitly considering ESG (Environmental, Social, Governance) and climate risks like flooding in determining market value. The updated section includes inquiries about energy usage and requires appraisers to assess the market value if the property is made more sustainable. This initiative aligns with Dynamic Credit's view that ESG and climate risk should be considered in determining the value of residential properties.

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.

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Jasper Koops - Head of Portfolio Management
Jasper Koops
Jasper Koops