Price Growth Hit Its Peak, but Dutch Housing Market Is Far From Cooling Down

Over the past one and a half years, houses have rapidly become more expensive in the Netherlands. And nothing much changed in the autumn of 2021: in the third quarter, houses sold were 17.5 percent more expensive on average than in the same quarter of the previous year. Year-on-year house price growth has been increasing for seven quarters in a row now. Only at the turn of the century was there similar growth in house prices (see Figure 1). At that time, however, price levels were considerably lower than they are today, making nominal price growth in euros an absolute record. The average house sold in the third quarter was more than 61,000 euros more expensive than in the same period last year.

House price expectations

We believe that the peak in price growth has now been reached. At 18.3 percent, year-on-year price growth in October was slightly lower than in September (18.5 percent) and we expect this trend to continue. Although the year-on-year rise will remain high next year, we expect growth to become more modest at the beginning of next year as the economy is expected to grow less exuberantly and unemployment will likely rise somewhat. The expectation is that capital market rates will remain at about the same level as this year. Mortgage interest rates are driven to a large extent by capital market rates. House prices have already risen substantially in recent years, partly due to declining interest rates. As capital market rates will not fall any further, price growth will gradually level off.

This year, we expect the average purchase price of a house in the Netherlands to increase by 14.9 percent. Next year, we expect another 12.4 percent increase. In this quarterly report, we estimate for the first time the price increase for 2023, a year in which we expect house prices to rise by only 3.2 percent.

The substantial price growth expected in 2022 is also due to the so-called carry-over effect. Due to the high price increases in 2021, prices are currently much higher than at the beginning of 2021. Even if house prices from November onwards were to remain at the same level as in October, 2022 would see year-on-year growth of 6.3 percent. The carry-over effect thus explains more than half of the house price increase we expect next year.

High price levels will continue to affect first-time buyers in the coming years. Although the end of price growth is in sight, houses remain as expensive as ever. As a result, it will continue to be difficult for first-time buyers to buy a home.

Regional differences in house prices

In the third quarter, Flevoland again recorded the strongest increase in home price growth, with a year-on-year growth of no less than 21.9 percent (see Figure 2). This is the fourth quarter in a row that Flevoland has taken the lead. At the bottom of the list is Limburg, where the increase was limited to an equally high 15.3 percent. Of the four largest cities, house price growth is lowest in Amsterdam: here, existing owner-occupied houses were 14.9 percent more expensive than one year before. Prices are currently rising rapidly in all regions.

However, this lower house price growth masks the fact that house buyers in Amsterdam also paid considerably more – expressed in euros – for their house than those who bought a house there a year earlier (see Figure 3). In the Dutch capital the average selling price rose by 79,000 euros. In Flevoland, the average selling price rose significantly less, by more than 63,000 euros. The fact that house prices there are still somewhat lower is probably one of the reasons why buyers from Amsterdam and Utrecht are moving to this province.

Particularly in provinces where house prices have risen less rapidly in recent years (Flevoland, Drenthe, Groningen and Friesland), house prices are now rising fast. It is somewhat striking that price growth in Limburg lags behind, while house prices there are still relatively low as well.

Regional house price forecasts

As price growth continues to accelerate in Oost-Groningen, we expect price growth in this region to reach 19 to 20 percent this year, just as in the current frontrunners Flevoland and Noord-Drenthe (see Figure 4). Amsterdam remains at the bottom of the list, although, at 12 percent, price growth is strong there as well. Next year, house prices are expected to grow most rapidly in Zeeuws-Vlaanderen and other parts of Zeeland, at 17 percent (see Figure 5). Utrecht (15 percent) and Flevoland (14 percent) also show high price growth.

The development of house prices in the various regions in 2023 remains highly uncertain, mainly because the timing of a turnaround in the housing market – in this case from high price growth to more stable prices – is difficult to predict. However, we do not yet expect house prices to fall in any region in 2023.

For-sale signs increasingly scarce

The fact that one price record after another is being smashed on the housing market is due to severe supply and demand imbalance. Demand for housing is high, partly due to low interest rates, while supply is inadequate (see Figure 6). In fact, historically, when set against the total number of owner-occupied homes, there have never been so few houses for sale.

New home construction stagnates

New home construction will bring little relief to first-time buyers in the coming years. Although the permit issuance procedure has recovered from the Dutch nitrogen crisis, the 12-month average appears to have stalled at the levels of 2017 and 2018 (see Figure 7). The number of new homes completed has not shown any increase for several years now, and we don’t expect that trend to be changing yet.

We anticipate it will be years before the desired annual housing production of 100,000 homes (in Dutch only) can be achieved. It is even questionable whether national ambitions in the area of housing construction will ever be achieved without a change of course. This is because Dutch municipalities – the administrative tier responsible for land-use planning – and their current residents do not have a sufficient interest in more new construction and because of obstacles that make building outside the existing urban areas difficult.

Even if the plans for 100,000 homes a year are pushed through, it remains to be seen whether all these homes will actually be built. Although there has been a modest increase in the number of permits issued, labor and building materials shortages in the construction sector are rapidly increasing (see Figure 8).

The construction materials industry has faced increasingly serious barriers due to labor and production resources shortages in recent quarters, well past the 2018 peak. Nearly 40 percent of companies in that sector are experiencing barriers due to workforce shortages, citing this as the biggest obstacle. As a result, construction companies have to reckon with a further increase in material shortages.

Despite the drying up of supply, the number of sales has remained stable so far this year, thanks to young adults buying more homes. Since the property transfer tax for first-time buyers was scrapped from 2021, they decided en masse to delay the transfer of their homes until after the start of the new year. But this fall, the number of transactions fell sharply. In the third quarter, 53,875 houses were sold, 13.4 percent less than in the same quarter last year. In October, the decline was even greater at 26.9 percent. We expect this trend to continue.

At a regional level, the picture is similar to the national picture. In all provinces, more houses were sold in the first nine months of 2021 than last year, but in the third quarter, the number of houses sold fell sharply in many provinces. In the province of Overijssel in particular, far fewer houses were sold. In Flevoland, the drop in the number of sales was much smaller.

Expectations for house sales

We expect 222,000 existing owner-occupied homes to change hands this year. Our estimate of the number of transactions has therefore been revised downwards compared to our previous quarterly report, which assumed 231,000 transactions in 2021. We expect 188,000 transactions next year and 195,000 in 2023.

The main reason for the downward revision in the number of transactions is that the market for existing owner-occupied homes has been depleted. This is causing the flow to stagnate even more than previously expected. According to NVM figures, the number of homeowners putting their houses up for sale has fallen sharply this year: in the third quarter, the figure was down 26 percent year-on-year. The tightening of the housing market is a self-reinforcing process. Homeowners do not want to run the risk of being stuck without a home, and therefore want to buy a new home first before putting their current one up for sale. If everyone does this at the same time, more and more households will be waiting for suitable properties, while (partly as a result) there will be less and less supply.

As was the case at the end of last year, we expect that this year a large group of young house buyers will delay the purchase of a home until after the start of the new year. The exemption from the transfer tax for house buyers under the age of 35 only applies to homes with a purchase price of up to 400,000 euros. This amount is indexed to the annual increase of the average WOZ value. Due to the high increase in house prices, the exemption limit goes up considerably.

In many European countries, prices of existing and new owner-occupied houses have risen sharply since the Covid pandemic (see Figure 9).[1] In Sweden, prices rose even more than in the Netherlands, although growth in Sweden already started before the coronavirus struck. But there are also exceptions to this rule, for example in southern Europe. Countries such as Spain and Italy suffered from severe lockdowns and tourism revenue loss.

[1] The international comparison figures differ slightly from the house price developments described in the first part of this paper. This is because the CBS's most commonly used house price index (PBK) relates only to existing owner-occupied homes, whereas the OECD house price index relates to both existing and new owner-occupied homes.

One explanation for the high growth in house prices is the decline in interest rates in recent years. This allows people to borrow more for a given income, and bid more. Fear of missing out may also play a role, now that interest rates remain so low. Another explanation is related to the coronavirus pandemic. The pandemic has driven demand for larger (owner-occupied) homes, not only in the Netherlands (in Dutch only) but also in the UK, for example. The explanation is that people are spending more time at home. This is often challenging, especially for small house owners. In addition, people were able to spend less money during the lockdowns, which led to an increase in savings in some households (in Dutch only). As a result, households have more money available to purchase homes, which has bolstered demand. After all, the amount needed for purchasing and transaction costs, and other equity contributions, was saved up sooner.

Especially in the Netherlands, the gap between house prices and incomes has widened considerably

Both in the Netherlands and in other European countries, the gap between income and house prices has widened in recent years (see Figure 10). Some other western European countries, such as the UK, Germany, and Sweden, are also experiencing a housing crisis, with home seekers often missing out or having to pay higher prices.

But in the Netherlands, the gap between income and house prices has widened much faster than in other countries. Moreover, with house prices still rising sharply, the gap between modal income and average selling price is widening further (in Dutch only). It is therefore not surprising that young adults, who are still at the start of their working lives and earn less, are increasingly reluctant to buy a house (see Figure 11). The decline in homeownership among young adults is not unique to the Netherlands. Among young adults in the United Kingdom, Australia and the United States, homeownership has also declined over the past 20 years (Arundel & Ronald, 2021).

As young adults are more likely to be dependent on the rental sector, they are excluded from the tax advantages of home ownership – such as tax relief on mortgage interest and the low tax on housing assets. Especially for new tenants, rents in the private rental sector are often sky-high, making it difficult for them to save at all (in Dutch only) – not to mention the capital that homeowners build up through repayments. The decline in homeownership among young adults therefore contributes to a further division in society. Other countries are also experiencing a division between the haves and the have nots.