T H E S U S TA I N A B I L I T Y O F T H E D U T C H H O U S I N G M A R K E T

NOVEMBER 2018

Adress Web

Bezuidenhoutsweg 16B2594AV The HagueThe Netherlands

www.dmfco.nlinfo@dmfco.nl

Rising prices, good affordability

De Telegraaf, February 13, 2018

“Pension funds are taking over the mortgage market”

“Many regions haven’t recovered from the

property crisis” FD, september 5, 2018

RTLZ, SEPTEMBER 14, 2018

“Property prices will increase faster”

AD, July 5, 2018

“10 YEARS AFTER LEHMAN: HOUSE PRICES ARE SKY HIGH BUT BUBBLE IS FAR AWAY”

House prices in the Netherlands have increased substantially the last few years. That has led to concerns about the sustainability of the Dutch property market. Is a new crisis looming? Or are we going to see a healthy adjustment?The claim that property prices have reached the peak level of 2009 is heard often. However, this calculation doesn’t take inflation into account. Adjusted for inflation, property prices are still 12% below the 2009 level. Amsterdam is a different situation: dwellings in the capital are 60% more expensive than in the rest of the country, and prices in Amsterdam will continue to rise. This Capital City Premium is not extraordinary: Brussels is 90% more expensive than the rest of Belgium, London is 115% more expensiveE

XE

CU

TIV

E S

UM

MA

RY

than the rest of the UK and UK and in Paris inhabitants pay 140% more than home owners in the rest of France. From an international perspective, Amsterdam’s housing market is not becoming untenable. The city is catching up and property prices show a correction that befits a city that becomes more international. The housing market in the Netherlands could be reaching a critical level if the mortgage debt would rise as well. That is far from the case, in the last six years the collective mortgage debt has stayed roughly at the same level. Combined with affordable mortgages, due to a strong economy and wage growth, and new laws aimed at lowering historically high LTVs, the Dutch housing market offers a healthy environment for investors.

INTRODUCTION The mortgage crisis of a decade ago is still fresh in our minds. It’s not surprising that doom scenarios are heard when strong movements in the property market happen. Dutch properties have increased by 30% since 2013 and are on the same level as in 2009. So many wonder: are we heading for a new crisis?

This question is understandable. Looking back to the financial crisis, a sustained period of rising property prices could be an indication for future market instability. The housing market becomes unsustainable, especially in the bigger cities, when dwellings get too expensive. The value of properties has been rising in record speed as the housing supply isn’t growing. Surely that would lead to an exploding bubble?

The Dutch housing market is doing well, but is it doing a bit too well? What do high property prices mean for investors in the Dutch mortgage market? And what is the influence of the current boom on the mortgage market?

PROPERTY PRICES EXAMINED

The price index of existing properties in the Netherlands gives a slightly altered view of reality. The index shows that prices have risen since 2013 and are now on par with 2009 levels. However, this recovery has mainly happened in the Randstad, the area in the central western part of the country that includes the four biggest cities and their surrounding areas.

Depending on the region, house prices in the Randstad are on average between 5 and 13% above the levels of 2009. In other regions of the Netherlands, mainly in the central eastern part, prices still lie 6% lower than in 2009.

There’s an essential element missing in the official statistics: inflation has not been taken into account. Corrected for inflation, property prices are still 12% below the peak levels of 2009. Henceforth the market is not operating on extremities right now.

Amsterdam is a different story. Compared to the rest of the country, property prices are 60% higher in the capital. Prices have risen continuously since 2005, with an extra boost in 2015. Is this a sustainable market? Both wages and rental prices are growing at similar pace, this keeps housing affordable.

Furthermore, it would be realistic to compare Amsterdam with other European capital cities instead of the rest of the country. Property prices in capital cities are always more expensive. Compared to the Capital City Premiums in Brussels (90% more expensive), London (115%) and Paris (140%), the Amsterdam Capital City Premium of 60% not that high.

There’s another trend visible in capital cities: prices are not only higher, they rise faster. In Germany this is not that clear yet: in the last three years, property prices went up with 5% on average, while in Berlin prices rose with 7%. Figures from the Dutch Central Bank (DNB) shows bigger differences in the UK (country: +7%, London +12%), Canada (country: +5%, Ottawa +15%) and China (country: 3%, Beijing +16%). Amsterdam’s property prise increase of 12% in the last 3 years is comparable to London, but the difference with the national average increase of 4.5% is bigger.

Centraal Bureau Statistiek, edited by DMFCO

Centraal Bureau Statistiek, edited by DMFCO

THE EFFECT OF BIGGER CITIES It will take another few years of price increases before Dutch property prices are back on their 2009 level. This is likely to happen. According to NVB, the Association for Property Developers and Builders, only 35,000 new dwellings will be built this year – just under half of the 75,000 that the Dutch government says are needed.

This results in upward pressure on house prices, mainly in the bigger cities. As the Dutch cities are full, inhabitants that want to move to a bigger house are forced out of the city, causing upwards pressure in the surrounding areas.

Houses in municipalities in the direct vicinity of the four big cities rose significantly more in value than in the rest of the country. On average, property prices increased by 25% since 2013 nationwide. The cities and towns close to Amsterdam saw the starkest increase, properties there gained 45% in five years’ time. In 2017, property in the city of Almere, to the east of Amsterdam, even increased 17% in value, while Amsterdam saw a 14% increase. A similar trend is visible in the other big cities in the Netherlands.

MORTGAGE DEBT Despite rising property prices, the real value of the average home is still lower than during the peak of 2009. That alone isn’t a reassurance that a crisis won’t be on the cards. The big question is if the mortgage debt is rising at a similar pace, as that could indicate a bubble is inflating. Figures from the national statistics agency CBS show that this isn’t the case: the combined Dutch mortgage debt has stayed at roughly the same level over the last six years.

This has several causes. The government introduced new tax measures, encouraging home owners to redeem their mortgages. The maximum LTV has been lowered to 100% and clear restrictions on the LTI were implemented. Low interest rates and an increase in wage growth (from 0.3% in recent years to 3% now and in the coming years) make it feasible for home owners to repay their mortgages. The number of defaults and payment arrears on Dutch mortgages, that is already low compared to other European countries, decreased by a further 12% in 2017 according to BKR, the Dutch national credit agency.

IS THE DUTCH HOUSING MARKET IN GOOD HEALTH? The health of the housing market is depending on the balance between property prices, mortgage debt, affordability, LTV, the number of transactions, the rental market and the supply of new and existing houses. Property prices are still below the 2009 level when corrected for inflation. Prices have risen strongly, but the houses are still affordable. Amsterdam is an exception, but from an international perspective the prices in Amsterdam are not that remarkable. A Capital City Premium occurs in most countries, and in many capitals the premiums are much higher than in Amsterdam.The housing supply is a cause for concern, with far too few new dwellings being built. However, the shortage in properties is limited to the big cities, causing a ripple effect in surrounding municipalities where there is upward pressure on property prices. Due to low interest rates and a decent wage growth, rising prices are still affordable for the average Dutch family. Furthermore, the combined mortgage debt is not rising substantially. All these factors indicate that the Dutch housing market is sustainable and in good health.

CONSIDERATIONS FOR INSTITUTIONAL INVESTORS Investors in the Dutch mortgage market have reasons for optimism. The value of the housing stock is increasing whereas the mortgage debt is staying at roughly the same level, at the same time the affordability of property remains good. Mortgage portfolios can be flexible and spread over multiple risk categories. Decisions on how to invest in the Dutch mortgage market should be based on the desired return potential and the risk that investors are willing to take. Investors can choose mortgages with a variable interest rate, but also mortgages that have a fixed interest rate of 5, 10, 15, 25 of 30 years. In addition, investors have the possibility to choose different LTV categories within their portfolio. The higher the LTV, the higher the relative return on the investment could be (adjusted for expected loss). However, higher LTVs might be accompanied by higher capital requirements for the investor. With DMFCO, institutional investors can build their own portfolio with different LTVs and fixed interest periods, which gives them maximum flexibility and control.

DMFCO is an independent and specialised asset manager that offers institutional investors direct access to Dutch residential mortgages. These form an attractive asset class with a high yield and a limited risk. Currently, DMFCO has €13bn in AUM from 16 different Dutch pension funds. The company is active since 2014 and has its offices in The Hague. A

BO

UT

DM

FC

O