Housing Market Quarterly: House prices rise further, average (prospective) owner-occupier falls short by over EUR 100,000

The housing market recovery continued unabated this spring. In April, existing homes for sale were, for the first time, more expensive than at the July 2022 price peak (Figure 1). While houses in May last year – at the market's low point – were still 6.2 percent cheaper than at the previous peak, the price level is now already 0.8 percent higher. Year-on-year, the existing home price index rose 7.5 percent in April. Between April 2023 and April 2024, the average home sold became more than EUR 30,000 more expensive (Figure 2).

The cooling down of the housing market and the subsequent recovery has thus lasted less than two years. The recovery is a lot faster this time than after previous periods with a cooling housing market, and house prices have also fallen less sharply. Since 2008, house prices have fallen 21 percent, until 2018, when a new price record was set. After 1978, house prices fell by 35 percent, and it took even longer to wait for a new price record: this came in 1993.

It illustrates how quickly demand has recovered, after potential buyers initially shied away due to rapidly rising mortgage rates. Rapidly rising incomes soon eased the pain of higher mortgage rates, with interest rates falling slightly again in the latter part of 2023. Meanwhile, potential homebuyers with one or two times the modal income are estimated to be able to borrow more again than in early 2022, when interest rates were historically low (see also Figure 7). High wage growth, together with new construction that structurally lags behind demand, are the main explanations for the rapidly recovering housing market this time.

We expect house prices to continue to rise sharply for the rest of this year and next year: this year we are assuming a 6.7 percent increase in prices of existing owner-occupied homes, and for next year we count on 5.2 percent (see Figure 3). In the last quarter of 2025, homebuyers are expected to pay over EUR 32,000 more for the average owner-occupied home than in April of this year.

The sharp rise in wages is the main cause of rising house prices. As a result, homebuyers can borrow more and more. As wage growth gradually levels off, the pace of house price increases is also expected to gradually slow. Capital market interest rates are expected to remain relatively stable in the coming years, although uncertainty is high. The growth rate of the economy also plays a role. Although the 2023 recession is behind us, the economy will grow less rapidly in the coming period than what is considered possible given productivity growth and labor supply trends. We anticipate slightly rising unemployment, from 3.7 percent today, to 4.2 percent by the end of 2025. From a historical perspective unemployment remains low, but rising unemployment slightly depresses the development of house prices.

Compared to our previous quarterly report, we have slightly increased our price expectations for this year, while we have slightly tempered expectations for next year. Last quarter, we were still assuming house price increases of 6.2 percent in 2024 and 6.3 percent in 2025. Back then, we anticipated that the bottom of the market was near at that point and that there was a chance "for the housing market to pick up faster than expected." That chance has since become a reality, and we have had to regularly revise our predictions upward over the past year. This spring, the housing market stepped it up again, and we assume that price increases will pick up some more this summer. Because in our last quarterly report we still assumed a slight decrease in capital market interest rates in 2025 while we are now assuming stabilization, our price forecast for 2025 is somewhat more moderate.

The development of interest rates has been an important driver of house price development over the past decade. For mortgage interest rates, the development of interest rates on long-term loans – the capital market rate – is particularly important. This rate determines the financing costs of mortgage lenders. The link between capital market interest rates and the ECB’s interest rate policy is indirect, because the ECB’s main interest rate instruments relate to loans with very short maturities. Market participants’ expectations about the ECB’s future policy rate determine the development of capital market interest rates.

In the period up to 2022, capital market interest rates – in Figure 4 we show the 10-year swap rate – fell to historically low levels. As a result, house prices rose sharply. Due to the low interest rates, the monthly costs of buying a house for the same purchase price decreased, and households could borrow more and more for the same income. The result: homebuyers started bidding more and more for homes, causing house prices to rise sharply. Starting in 2022, the opposite happened. While the 10-year swap rate was still 0.3 percent in early 2022, it was 3.1 percent a year later, and as high as 3.5 percent at the peak in October 2023. due to the effect on mortgage rates, the monthly costs of owner-occupied homes increased and homebuyers' borrowing capacity declined (see Figure 7). After the interest rate hike in 2022, a household with a twice-modal income could borrow more than EUR 30,000 less than at the beginning of that year. It ushered in a period of falling house prices. Meanwhile, at 2.8 percent, the 10-year swap rate is already much lower than at its peak in the fall of 2023, but still substantially higher than before interest rates began to rise.

Figure 4 shows the expectations for the ECB's deposit rate and the 10-year swap rate that we used as a starting point in our housing market estimates. Although the ECB is expected to start cutting policy rates in stages this summer, we assume that this will not lead to a further decline in capital market rates as financial markets have already priced this in. We expect capital market interest rates to continue to move around current levels. The future development of interest rates does remain surrounded by considerable uncertainty, which – due to the great importance of interest rates for the development of demand for owner-occupied housing – translates one-to-one into uncertainty about the future development of house prices.

Although interest rates are expected to stabilize, we think borrowing capacity will still increase substantially in 2024 and 2025 (see Figure 5). This is due to wage growth. For this year, we assume an average CLA wage increase of 5.7 percent, and next year it will be 4.5 percent. Even in 2023, CLA wages rose more than 6 percent. Because of the increased wages, households – despite the still high interest rates – can already borrow EUR 10,000 more this year on a twice-modal income than in 2022 before interest rates began to rise, and next year they can borrow just under EUR 20,000 more. The fact that we are now assuming stabilizing rather than declining capital market interest rates in 2025 does mean that the increase in borrowing in that year will be somewhat lower than previously thought. In our previous housing market quarterly, we still counted on an increase in the maximum mortgage for a twice-modal income of almost EUR 40,000 in 2025.

How the housing market develops is determined not only by fundamental factors such as interest rates and the available housing stock, but also by market sentiment. People's confidence in the housing market is on the rise this year (see Figure 6). Here, expectations about interest rates play a big role. Many people think that mortgage rates will stabilize or even decline in the coming period. The expectation that house prices will continue to rise reinforces this sentiment. Confidence in the housing market is now about the same as the average score over the past 20 years. However, there is no real sunny mood yet, due to the poor affordability of owner-occupied homes and what housing consumers consider to be unfavorable economic conditions.

Virtually all regions saw existing home prices rise in the first quarter of 2024, both compared to the previous quarter and compared to the same quarter one year earlier. The Gooi and Vecht region is an exception, where house prices fell both quarter-on-quarter and year-on-year. In contrast, Delfzijl and the surrounding area recorded a year-on-year price increase of a whopping 10.7 percent in the first quarter.

In 17 of the 40 COROP regions, existing owner-occupied homes are again as expensive as, or even more expensive than, at the 2022 price peak. But in the majority of regions, owner-occupied houses are still cheaper than at the peak, despite recent price increases (see Figure 7). In the Gooi and Vecht region and the Haarlem agglomeration, houses are even 8.9 percent and 5.5 percent cheaper, respectively. These are also regions that have experienced relatively sharp price declines.

We expect all regions to eventually record a house price plus this year (see Figure 8). Especially in the regions of Groningen and Flevoland, that plus – of 8 percent or more on average – will be solid. For leader Delfzijl, we even foresee an average price increase of 11 percent. In regions where houses are relatively expensive, prices rise significantly less. For the straggler Het Gooi we assume a relatively limited price increase of 3 percent on average. Now that the affordability of owner-occupied houses has improved somewhat due to rising wages, we expect price growth to pick up significantly in the regions of the northern wing of the Randstad as well. Especially in the Utrecht region, we expect substantial price increases again this year, while for Amsterdam we expect price increases close to the national average.

The income needed by homebuyers to fully finance the median owner-occupied home sold in the first four months of 2024 with a mortgage loan varies widely across regions (see Figure 9). One-and-a-half times the modal income is almost never sufficient, but with two modal incomes homebuyers can get by in the majority of municipalities. In cheaper municipalities such as Heerlen, Kerkrade and Pekela, a household income of EUR 60,000 – slightly less than one-and-a-half times modal – is sufficient for the average priced owner-occupied home.

Municipalities where you won't get anywhere with two modal annual incomes are mainly found in the Randstad and in Eindhoven and its surroundings. In the Gooi, along the coast (Bloemendaal and Wassenaar) and around Amsterdam, households need to earn as much as over EUR 100,000 to finance an average-priced house. In Bloemendaal and Laren, nearly EUR 160,000 or more is needed. Contrary to the stereotypical image of beautiful, affordable homes in leafy neighbourhoods, even in former growth centers such as Almere and Huizen, two modal annual incomes are insufficient for the average priced owner-occupied home. In Haarlemmermeer, an annual income of EUR 104,000 is required.

Not only do house prices differ between regions, but so do incomes. Therefore, we have calculated per region how much (in euros) the average (prospective) owner-occupier is short of a median home purchase in the municipalities within that region. This includes the income of first-time buyers who bought a house in the previous two years and people currently renting who want to move to a house. Because many people do not work in the municipality where they live, but often within commuting distance, we determined median income not at the municipality level but for each of the 40 COROP regions.

In practice, the average income of local (aspiring) owner-occupiers in almost every region is insufficient to finance the average priced home (see Figure 10). On average, in the Netherlands, (would-be) owner-occupiers are short about EUR 123,000. But in large parts of the Randstad and East Brabant, this shortfall rises to over EUR 200,000. In very expensive municipalities, such as Laren and Wassenaar, the shortfall is even more than EUR 400,000. The average income is almost sufficient in only a few municipalities, especially those in the shrinking region of Parkstad Limburg. Of course, even in expensive regions there are first-time buyers who do manage to buy a house. For example, because they earn more than the average household income of (prospective) first-time buyers, because they buy a cheaper house than the median home sold, or because they have saved up or have received a gift.

All European countries were hit by the same shock in 2022: rising energy and commodity prices, and international uncertainty. Although the economic impact varied from country to country, all countries saw inflation rise, leading without exception to interest rate hikes by central banks. With that, homebuyers everywhere faced higher housing finance costs. How did this play out in different countries?

In the EU, house prices fell in 17 of 27 countries as of 2022 (Figure 11). At 18 percent, this decline was strongest in Luxembourg, followed by Germany at 14 percent. Outside Europe, the housing market also cooled in many countries (Figure 12). For example, house prices in New Zealand fell by as much as 18 percent.

Interestingly, there are also countries where house prices have continued to rise uninterruptedly, sometimes substantially. In frontrunner Croatia, house prices increased by as much as 16 percent as of the third quarter of 2022. Countries where house prices have continued to rise in recent years are, with the exception of Portugal (where 43 percent of homeowners have a mortgage), countries where owner-occupied homes have been financed mainly with own money. In Croatia, for example, only 7 percent of homeowners have a mortgage, despite a homeownership rate of more than 90 percent. This is due in part to how Croatians acquired their homes: only 28 percent bought their own home, while 36 percent built the home themselves and 34 percent obtained it as a gift or inheritance. Many other Eastern European countries also combine high home ownership with relatively low mortgage financing. It is little surprise that interest rates in countries where home financing is less dependent on mortgages have a smaller impact on house prices.

Other differences also exist between countries. For example, in some countries (such as the Netherlands, Belgium, France and Germany) mortgages with long fixed-interest periods are common, while in others (for example, Austria and the Nordic countries) mortgages with variable interest rates are common. In countries where variable mortgage rates are the norm, rising interest rates have a direct and major impact on many existing homeowners. Furthermore, some countries have generous mortgage interest deductions, such as the Netherlands, Norway and Switzerland. This dampens the effect of a rise in interest rates on housing costs. Finally, mortgage standards differ. For example, the maximum mortgage households can get based on their income depends on interest rates in the Netherlands, but this is not the case in all countries.

The pace of recovery also varies considerably across countries. Ten of the 17 EU countries where house prices fell from 2022 onwards saw their housing market recover (somewhat) in the last quarter of 2023. Some of the countries where house prices were still falling at that time may have seen recovery this spring. Recent data is limited, but in Germany, for example, house prices showed a slight increase again starting in February (Figure 12).

Sales of existing homes for sale have been slowly but surely picking up since the beginning of this year (see Figure 13). Between May 2023 and April 2024, 189,280 homes changed hands. That's slightly more than in the same period a year earlier. And we haven't seen such a sales plus in quite some time.

For this year, we assume 188,000 home sales, followed by 182,000 transactions in 2025 (see Figure 14). Historically, these are not extraordinarily low numbers. On average, over 184,000 homes changed hands each year from 1995 through 2023. But today, the Dutch housing stock does have a lot more owner-occupied houses than, say, in the 1990s. From that perspective, the number of transactions can indeed be called modest.

The fact that relatively few existing homes are being sold is not because of a lack of demand, but because few homes are coming up for sale. Currently there are about 30,000 homes for sale by NVM brokers, and that is about a third less than at the peak in the last quarter of 2022 (see Figure 15). The number of transactions is not as low as you might expect based on the number of homes for sale, though. And that's partly due to the fact that houses are simply selling very quickly. In the first quarter, homes changed hands on average within 34 days, and that's well below the long-term average of 84 days. The market is expected to dry up further in the coming period, and to a greater extent than we assumed at the beginning of the year. Partly for this reason, we have revised the expected number of sales for 2025 downward from the previous estimate, when we still assumed 183,000 sales for 2025.

For now, homebuyers will continue to suffer from the lack of supply. This is partly due to the lack of new construction (see Figure 16). At the same time, we are seeing some positive market developments. The dip in permits seems to be behind us. Also, sales of new-build homes have picked up recently. This recovery is expected to continue in the near future.

Moreover, a large number of to be constructed homes are in the pipeline. As of March, as many as 184,000 houses were in the pipeline (see Figure 17). Those houses have already been licensed or construction has already started. Interestingly, despite the dip in building permits, the number of homes for which a building permit has already been granted but construction has not yet started increased. This means that the rate at which building permits are granted has declined less sharply than the rate at which construction of new homes has started. For the short term, that means fewer completed homes, but it also means that there are many projects whose construction can start quickly when the market rebounds.

Although the number of houses for which construction has already started has declined slightly, there are still many more houses in the pipeline today than a few years ago; in early 2020, for example, the pipeline counter stood at 153,000 houses. EIB's business survey shows that housing construction companies still have 12.5 months of work in progress. This means that, for the time being, construction can continue swiftly. It is possible that the large number of homes in the pipeline could dampen the anticipated dip in new construction somewhat.

At the same time, all these positive new construction signals do not mean that we will see many more for sale signs in front of existing homes any time soon. Because even though more new homes are now being sold, it will take quite some time before those new homes are built. And therefore also before homeowners start putting their homes up for sale because they have bought a new home.