Are house prices expected to drop in the short term?
All the recent developments have had a huge impact on the Dutch housing market and the house prices. The mortgage interest rates have risen sharply, resulting in fewer houses sold over the past months. Does this imply that house prices have reached their peak? Are house prices expected to drop? And do we have to fear another housing market crisis?
We have made an inventory of various factors that affect the current housing market. Moreover, several banks are already taking the developments for the coming year into account, albeit tentatively. Can we expect house prices to go drop soon?
Factors that affect demand
The Netherlands has seen an overheated housing market for several years. This situation is partly caused by the extremely low mortgage interest rate whereas the other factor is the shortage of houses compared to the high demand. Simply put, the number of new houses being built has been falling behind for many years. However, circumstances have changed very rapidly and significantly.
Over the past year, the mortgage interest rate has increased from less than one per cent to four per cent (based on a 10-year fixed interest period). Although this rate is still low, considering what it once was, it still means that the interest has quadrupled. The sharply increased mortgage interest rate is indirectly caused by high inflation. Central banks increased their interests considerably in an attempt to keep inflation under control, and the Dutch mortgage interest is directly linked to that.
The current inflation also leads to a decreasing purchasing power among consumers. Everything is getting more and more expensive, and the energy price hikes are the starkest example of all.
Needless to say that these developments are affecting the housing market as well. Buyers become hesitant, they can borrow less, and postpone the purchase of a new house. This clearly shows in the initial figures, with a decreasing demand for new houses: compared to last year, the number of houses sold during the first 8 months of 2022 has dropped by 20%.
Still, we may see that some of these effects will be temporary. The rapid increase in energy prices is not expected to continue. The developments indicate that price caps will be set and this will lower the effect on inflation. Consequently, a decreasing inflation will result in lower market interest rates after which the prices and the markets can stabilise. There still are numerous other (uncertain) factors that may influence the market and consumer confidence, but it is unlikely that the current increase in prices will continue. Given enough time, this will affect the housing market as well.
How do the Dutch banks expect the housing market to develop over the coming period?
The most obvious scenario
A quadrupled mortgage interest and a decrease in sales suggest that house prices have reached their peak. The most recent sales figures do seem to reflect this. Last month, the increase in prices slowed down some more, but they don’t seem to go down as yet and they are not expected to do so within the short term. Both ING and Rabobank foresee that the housing market will cool down. While Rabobank still expects a modest 3% price increase in 2023, ING bets on a slight decrease. None of the banks, however, expect a major housing market crisis, such as the one we experienced in 2008. The current scenario seems to be the most obvious one, providing the inflation percentage doesn’t rise any further and the central banks manage to keep it under control again.
On the other hand, if the inflation percentage doesn’t go down after all the recent spiking interest rates, the central banks will be more or less forced to increase the interest rates even more – resulting in a mortgage interest of nearing five per cent. A drop in house prices may well be inevitable should that happen.
Apart from the above, the next period will be affected by many more uncertainties and developments that have a bearing on house prices and a possible house price drop. And this is exactly why many consumers are careful when making important financial decisions.
