Cooler breeze on Dutch housing market, but young adults fall some 100,000 euros short for the average home

In the first quarter of 2019, home buyers paid on average 301,279 euros for a home. They paid on average 23,000 euros more than those who bought a home one year earlier. There are large differences between provinces. In North-Holland, home buyers paid on average 170,000 euros more than those who bought a house in Groningen (Figure 1). If we adjust for inflation, the average selling price is back at the level of the beginning of 2008 (Figure 2). Compared to the second quarter of 2013, which was the bottom of the housing market during the crisis, the real average selling price is about one third higher (Figure 2).

The Dutch house price index of Statistics Netherlands (in Dutch: CBS) and the Dutch Land Registry (in Dutch: Kadaster), which corrects for the changing composition of homes that are being sold (such as the type of house), was 7.9 percent higher in the first quarter than in the same period in 2018 (see Figure 3). Especially in the province of Flevoland, the house prices rose sharply with a price increase of 11 percent. The increase was the lowest in the provinces of Groningen and Friesland.

It is particularly striking that house prices have risen less in the first quarter than in the previous quarters. The 12-month rolling average of the month-on-month growth is also showing a slowdown in the increase of house prices (see Figure 4).

Last year the Dutch government estimated in their National Housing Agenda that the housing stock should grow by 75,000 homes each year until 2025 to make up for the current housing shortage. But according to ABF Research and Capital Value this is not enough because the shortages keep on increasing. They calculated a housing shortage of 263,000 dwellings at the beginning of this year and that 95,000 to 115,000 dwellings are needed annually to make up for the high housing shortage. However, in reality, the housing stock is growing less rapidly than needed. In 2018 the housing stock grew by just 73,516 homes (Figure 5). On the bright side: this is still much more than the amount of homes being added to the housing stock in previous years. For instance, in 2017 only 54,807 houses were added to the housing stock. The increase in the amount of homes added to the housing stock is merely due to the relatively low number of homes being withdrawn from the housing stock (for instance due to demolition) than an increase in the number of newly build homes.

Last year, just under 66,000 new houses were built, half of which in the highly urbanized Randstad region (see Figure 6). This means that construction of new homes is still not back at the pre-crisis level: between 2004 and 2008 an average of 77,000 homes were built each year. The construction sector says its being plagued by a shortage of workers and constrained building capacity (EIB, 2018), while land speculation may make it harder to develop certain places (FD, 2019). Additionally, there are few locations where construction is allowed, according to research by the CPB (Netherlands Bureau for Economic Policy Analysis. They also find that the construction is hindered by high requirements municipalities impose on the quality of homes and the location of new construction projects. The growth in new construction is therefore levelling off, as is the number of building permits issued. Especially in regions where the tension of the housing market is highest.

Due to the lack of housing supply and the rise in housing rents and housing prices, there are serious concerns about the chances of young adults to find an affordable home on the Dutch housing market. And especially about those who earn too much for a social rental home, but too little for a rental home in liberalized part of the rental sector, with its high and increasing rental prices. To what extent is buying an alternative? According to the Netherlands’ Housing Survey (see box "Estimating the chances of potential first-time buyers”), the owner occupied housing sector lost popularity during the housing market crisis of 2008-2013 among young adults with an intention to move (Figure 7). But after the crisis, the owner occupied sector became attractive again. By now, a higher share of young adults would like to move into homeownership compared to 2006 and 2009. Despite the high housing prices, almost half of the young adults with an intention to move, preferred moving into homeownership in 2018. Especially young adults in the liberalized rental sector prefer to buy a house. In 2018, this applied to three-quarters of them. This is possible due to the high and still rising rents, because of the young adults intending to move out of their parental home, only 38 percent had a preference for buying.

But of course, wanting to buy does not necessarily mean being able to buy. Whether young adults are actually able to become homeowners doesn’t just depend on the amount of houses on the market, but also by their financial situation -specifically their gross household income. The National Institute for Family Finance Information (Nibud) calculates norms indicating the maximum amount a household can spend on housing given other necessary costs of daily living, and subsequently the maximum mortgage loan a household can get based on the gross household income.

On average, young households preferring to move into their own owner-occupied home have a gross income of 43,000 euros per year. Based on a 10-year fixed mortgage interest rate of 1.75 percent, this means a maximum mortgage of around 195,000 euros. Young dual-income households who want to buy their first home can borrow on average 257,000 euros. This is logically much more than those who want to make the step to homeownership on one income: their average maximum mortgage is only 135,000 euros.

There is a big gap between the average maximum mortgage of young adults preferring to move into homeownership and the average selling price. On average, young adults are short about 100,000 euros for the mean selling price. Of course, one can argue that potential first-time buyers are still at the beginning of their residential careers, and might therefore prefer to move into a smaller house in a cheaper segment of the housing market. But even apartments were sold for 264,000 euros on average in the first three months of this year. And buyers shelled out on average almost 278,000 euros for a terraced home.

In all of the twelve Dutch provinces potential first-time buyers appear to come short (Figure 8 and Figure 9). For example, young adults wanting to buy in the province of Utrecht can borrow just under 225,000 euros on average. But the average selling price in that popular region is around 260,000 euros. The ratio is even more skewed in Noord-Holland: potential first-time buyers can borrow just under 58 percent of the average selling price, despite the relatively high income in the region (Figure 9). The ratio is less skewed in Groningen and in Limburg. Young adults who want to buy their first house in the province of Limburg, can borrow on average about 70 percent of the average selling price. Best of are those who prefer to buy in Zuid-Holland: on average, they can borrow approximately 74 percent of the average selling price. This is due to the relatively high incomes but - compared to the rest of the Randstad - modest average selling price.

The same conclusions can be drawn if we look at the four parts of the country and make a distinction between single income households and dual income households. Irrespective of the location, dual-income households are better off than single-income households. But despite their higher maximum mortgage, their average maximum borrowing capacity is still not sufficient to pay the average selling price (see Figures 10 and 11).

Given the above, it’s no surprise that the share of young adults is declining in total sales. In the first quarter of 2019, 43.8 percent of all transactions went to the 35 and under age bracket, compared to 44.3 percent one year earlier. In 2009 about 59.0 percent of all sales involved young adult households (see Figure 12). Especially in the apartment segment, the share of young adults in total sales is declining: before the crisis, around 60 percent of all sold apartments were bought by young adults, compared to 40 percent at the beginning of this year (see Figure 12). Possibly, this development is related to the ageing of the population. If elderly want to move, they prefer to move to an apartment. In 2018, this applied to approximately 71 percent of households aged 65 years and over who want to move and prefer to buy a home. As older households generally have more financial means than young adult households, it is quite possible that young people cannot compete with elderly households in the ‘battle’ among apartments.

The possible struggle between young people and elderly households is primarily a supply problem. According to the NVM, the branch organization of real estate agents and appraisers, only 42,000 homes were for sale in the first quarter of 2019 (Figure 13). This is 17 percent less than one year earlier. Not surprisingly, fewer and fewer houses are being sold. In the first quarter of 2019, 47,431 homes changed hands, which is 9.0 percent less than a year earlier. In Rotterdam, where housing prices rose fastest, the number of sales fell by 20 percent (Figure 14).

In contrast, the number of sales barely changed compared to one year ago (-0.6 percent). Although the number of sales has fallen sharply recently, the number of homes being sold is still higher than in the years before the crisis (Figure 15). It could be that the number of sales in the last couple of years was relatively – and temporarily – high because of a catching-up effect after the crisis. Possibly, the amount of sales is now slowly going back to its new, natural level.

Headlines in recent months varied from "Madness on the housing market is somewhat declining" to "Housing prices have fallen for the first time in three years". For the first time in four years, the confidence in the housing market is negative again (Figure 16). And despite a slight recovery in the last quarter, only 2 out of 10 people find it currently a (very) favourable time to buy a house (Figure 17). In the second quarter of 2016, this applied to 6 out of 10 people. According to the NVM the amount of homes for sale is slightly increasing in some regions - including Amsterdam – while the extent to which houses are being sold above the asking price is somewhat declining. And as mentioned earlier, housing prices are increasing less rapidly compared to previous quarters.

With the recent housing market crisis in mind, these signals raise the question: are we heading into the direction of a new housing market crisis? According to some experts, this is not the case because of the housing shortage. And following the economic principles of supply and demand, this should cause an upward pressure on housing prices. However, economic laws don't always apply to the housing market. From an economic point of view, the housing market is not a "perfect market". The period 2008 to 2014 teaches us that house prices can fall even in times of a shortage of homes. In 2012, there was a shortage of 162,000 homes according to ABF Research. Nevertheless, housing prices fell, the number of sales dropped and the construction of new homes collapsed. During those years, the housing stock functioned as a ‘sponge’, at least in the cities, according to a study by the PBL Netherlands Environmental Assessment Agency: the number of households grew faster than the number of homes, causing the average occupancy rate to increase. So a housing shortage might not be the most important indicator to look at when gauging the likelihood that the market will weaken.

In our view a souring economy could prove much more relevant to the housing market than a lack of homes. GDP is still expanding though, and Dutch unemployment has dropped to a 15+ year low of 3.3 percent. Meanwhile mortgage interest rates appear stuck at historical lows (see Figure 18). Three months ago we wrote that we expect house prices growth to taper off from 9 percent in 2018 to 6 percent in 2019, mostly due to spill-over[1] (see Figure 19). Given recent developments, we stick to these expectations. For 2020, we forecast price growth to level off even further. We also keep our sales prognosis steady: in 2019 some 205,000 homes are expected to change hands, about 6 percent less than in 2018 (see Figure 15).

It should be noted that these forecasts have become more uncertain since our last Quarterly update. There are some signs that price growth is tapering off quicker than we have currently pencilled in. An example is the latest update from the Dutch Association of Real Estate Brokers (NVM), which reports that transaction prices have stabilized. NVM claims their figures precede official sales figures by about two to three months, meaning they serve as a rough leading indicator.[2] This implies stagnating or even slightly declining prices in the Dutch Land Registry’s official second quarter figures. We will keep a close eye on these developments in the coming months and will adjust our forecasts accordingly.

[1] House prices rose very rapidly in 2018, meaning that home buyers paid considerably more in December 2018 than those who bought in January of 2018. Even when homes in January of 2019 are sold for the same price as a month earlier (i.e. no m-o-m change), the y-o-y growth is still considerable.

[2] NVM reports a sale the moment a buyer and seller both sign the purchase agreement, the Dutch Land Registry doesn’t register the sale until the house-key changes hands at the notary’s office.

The Dutch Housing Market Quarterly is a publication of RaboResearch Rabobank. The view presented in this publication has been based on data from sources we consider to be reliable. Among others, these include Macrobond, Land Registry, NVM, DNB, CPB and Statistics Netherlands.
The date of completion is May 13th, 2019.

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Text contributors:
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