Past and future developments in the Dutch and Belgian
housing markets
Mr Allard Bruinshoofd
Head of International Research Rabobank
Mr Edwin De Boeck
Chief Economist KBC
Monetary and Financial Commission
Quo Vadis Dutch Housing Market?
Allard Bruinshoofd
Head of International Research
Rabobank Nederland
Agenda
Quo vadis Dutch housing market?
• Historical developments
– Price dynamics and international comparison
• The financing side
– Both thrifty and indebted
• Outlook
– From over- to undershooting
Characteristics Dutch housing market
Historical price development
Characteristics Dutch housing market
International comparison
Characteristics Dutch housing market Fundamentals to support valuations
• Structural shortage of supply, especially in the urban areas
• Demand for housing will remain high as the number of households increases
• Dutch houses are mainly for ‘consumption’
– Full mortgage interest tax deductibility
– No speculation, no buy-to-let market
• Mortgages issued are solid
– Sub-prime sector non-existing (before crisis < 1%)
– Code of conduct
– Fixed interest rate mortgages
The financing side
The dominance of debt financing
The financing side
Relatively high gross debt to GDP ratio
0 20 40 60 80 100 120 140
0 20 40 60 80 100 120 140
Residential mortgage debt to GDP ratio (2010)
% %
The financing side
A challenge for the loan supply-side
0 100 200 300 400 500 600 700
0 100 200 300 400 500 600 700
06 07 08 09 10 11 12 13
MFIs Special purpose vehicles Pension funds
x € bln x € bln
The financing side
Indebted yet thrifty
The financing side
Illiquid pension savings
The financing side
The apparent significance of fiscal treatment
Outlook
Low payment arrears
0 5 10 15 20 25
0 5 10 15 20 25
04 05 06 07 08 09 10 11 12 13
Netherlands Portugal UK Spain
Italy Ireland Greece
% %
Outlook
Although unemployment picks up sharply …
2 3 4 5 6 7
7300 7700 8100 8500 8900 9300
03 04 05 06 07 08 09 10 11 12 13 Unemployment (r) Employment (l) Labour force (l)
Number of persons x1,000 % labour force
Seasonally adjusted
(Eurostat definition)
Outlook
… it compares well internationally
0 5 10 15 20 25 30
0 5 10 15 20 25 30 %
%
Unemployment rate, May 2013
Outlook
That said, additional austerity on the way
-16 -14 -12 -10 -8 -6 -4 -2 0 -16
-14 -12 -10 -8 -6 -4 -2 0
11 12 13 14 15 16 17
Tax hikes Spending cuts Additional cuts
EUR bn EUR bn
Outlook
… keeping disposable income under pressure
Outlook
House prices near long-run equilibrium
Conclusions
Quo vadis Dutch housing market?
• Housing wealth increasingly built upon rising mortgage debt
• Mounting debt levels, illiquid assets
• Household & public sector balance sheet adjustment
• Policy uncertainty tapering off – MID changes
– A temporary-turned-permanent sales tax reduction
– Measured reduction in max LTV
– Though still uncertainty about whether this is the end-point
– Unequal treatment of new vs old entrants
• Unclear yet: back to a dynamic market for owner-occupied homes?
More information & free electronic newsletter:
www.rabobank.com/economie
Or @RaboEconomie
Belgium’s housing market
Something to worry about?
September 2013
Chief Economist Department KBC Groep
0 50 100 150 200 250 300 350
Nominal house prices Real house prices Consumer prices
House prices in Belgium (1995Q1 = 100)
A long-lasting period of rising prices
Correction in 2009H1 was little more than a blip
75 100 125 150 175 200 225 250 275 300
Belgium Germany France Netherlands EMU
House prices in neighbouring countries
(1995Q1 = 100)
0 50 100 150 200 250 300 350 400 450
Ordinary houses Villas & bungalows
Apartments, flats & studios Building lots
Property prices in Belgium by type (1995Q1 = 100)
A long-lasting period of rising prices
(Substantial) differences between types and regions
0 50 100 150 200 250 300 350 400 450 500
Brussels Flanders Wallonia
Ordinary houses Villas & bungalows
Apartments, flats & studios Building lots
Property prices in Belgium by region
(cumulative increase in 1995Q1-2013Q2, in %)
-15 -10 -5 0 5 10 15 20
EMU Belgium Ireland Spain
Net external migration (per 1000 inhabitants) Number of households growing
faster than the population
2,3 2,35 2,4 2,45 2,5 2,55 2,6 2,65 2,7 2,75 2,8
90 95 100 105 110 115 120 125 130
135 Population (1980 = 100)
Number of households (1980 = 100) Number of persons per household (rhs)
Growing demand, limited supply
Demographics fueling house purchases
Immigrants (still) pushing up
population growth
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
Belgium France Germany Ireland Netherlands Spain
Growing demand, limited supply
No excessive building boom
Construction sector in line with the pattern of general activity
1000 1020 1040 1060 1080 1100 1120 1140
3500 3700 3900 4100 4300 4500 4700 4900 5100 5300
Housing units per 1000 families (rhs) Number of housing units (in '000, lhs) Number of households (in '000, lhs)
0,0 0,2 0,4 0,6 0,8 1,0 1,2 1,4 1,6 1,8
Netherlands
Belgium
10 20 30 40 50 60 70
0,00 0,50 1,00 1,50
Homeow nership w ith mortgage lo an (% of households)
Tax relief on mortgage debt financing (*) Tax relief on mortgage debt financing
(2009) (*)
(*) Indicator taking into account a) deductibility of interest payments on mortgage debt from
Growing demand, limited supply
Tax treatment not exceptionally generous
60 80 100 120 140
160 Price-to-income ratio (affordability) Price-to-rent ratio
Overvalued
Undervalued
60 70 80 90 100 110 120 130 140
Price-to-income ratio Price-to-rent ratio
Average Q1 1996 – Q1 2013 = 100
Q1 2013
Housing market valuation
Traditional measures suggest the Belgian market is strongly overpriced...
Valuation measures Belgian housing market
(long-term average = 100)
90 100 110 120 130 140 150 160 170
Belgium Germany France Netherlands EMU
Rental prices in Belgium and the neighbouring countries
(1996 = 100)
Housing market valuation
Trend of house prices above EMU-average, trend of rental prices below EMU-average
Overvalued
Undervalued Valuation measures Belgian
housing market (long-term average = 100)
60 80 100 120 140
160 Price-to-income ratio (affordability) Price-to-rent ratio
60 80 100 120 140
160 Price-to-income ratio (affordability) Price-to-rent ratio
Interest-adjusted affordability
Overvalued
Undervalued
Housing market valuation
Affordability boosted by declining mortgage rates
0 2 4 6 8 10 12 14
Mortgage loan interest rate Belgium (in %)
Valuation measures Belgian
housing market
(long-term average = 100)
60 80 100 120 140
160 Price-to-income ratio (affordability) Price-to-rent ratio
Interest-adjusted affordability Econometric regression (*)
Overvalued
Undervalued
Valuation measures Belgian
housing market (long-term average = 100)
Housing market valuation
Model-based approach, including demand variables
Broader ‘fair value’ model includes broader set of demand variables:
Demographics: number of households (trend)
Unemployment rate
Real disposable income
Real mortgage interest rate
60 80 100 120 140
160 Price-to-income ratio (affordability) Price-to-rent ratio
Interest-adjusted affordability Econometric regression (*)
Overvalued
Undervalued
Valuation measures Belgian
housing market (long-term average = 100)
60.8
37.3
8.7 11.6
% overvaluation
Price-to-rent ratio (Q2 2013) Price-to-income ratio (Q1 2013)
Interest-adjusted affordability (Q1 2013) Econometric regression (*) (Q1 2013)
Housing market valuation
We estimate the overvaluation at some 10%
Most comprehensive
approaches
-50 -30 -10 10 30 50 70
Average Maximum Minimum
ECB-estimates of the over/undervaluation of housing markets in selected EU countries (Q1 2013) (*)
Housing market valuation
ECB’s average estimate (23%) biased by the two traditional measures
(*) Estimates based on four different valuation methods: price-to-income ratio, price-to-rent ratio and two model-based methods
0 50000 100000 150000 200000 250000 300000
Belgium Flanders Netherlands
0 50000 100000 150000 200000 250000 300000
Belgium Flanders Netherlands
Housing price levels
Dutch houses no longer more expensive than the Belgian/Flemish ones...
Average house price levels: Belgium & Flanders versus the Netherlands (in EUR, end of year)
Apartments
Single-family houses
Housing price levels
...price levels however not unusually higher than elsewhere in Europe
0 5000 10000 15000 20000 25000
Average sq.m. price of a 120 m² apartment located in the capital (in EUR, end 2012)
100000 120000 140000 160000 180000 200000 220000 240000 260000 280000
Average single-family house price
(in EUR, end 2012)
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
2013 2014 2015
Impact real interest rates Impact unemployment
Impact real disposable household income Real house price increase(+) / decrease(-)
Looking forward
A ‘correction’ (about 10%), not a crash in 2013-2015...?
Model-based forecast real house prices Belgium (see table for inputs macroeconomic determinants)
2012 2013 2014 2015
KBC outlook for the macro‐determinants of house prices:
Real GDP growth ‐0.3% 0.1% 1.2% 1.4%
Growth real disposable income 0.7% 0.4% 1.0% 1.3%
Uemployment rate (end of year) 8.1% 9.0% 9.2% 8.8%
Inflation (end of year) 2.2% 1.2% 1.5% 2.0%
10‐year interest rate (end of year) 2.1% 2.5% 3.0% 3.0%
Real 10‐year interest rate (end of year) ‐0.1% 1.3% 1.5% 1.0%
Model‐based forecast house prices:
Real house prices ‐8.9% ‐1.1% 4.6%
Nominal house prices ‐7.7% 0.4% 6.6%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
2013 2014 2015
Impact real interest rates Impact unemployment
Impact real disposable household income Real house price increase(+) / decrease(-) Model-based forecast real house prices Belgium
(see table for inputs macroeconomic determinants)
Forecast based on the econometric model (macro-fundamentals) does not take into
account :
A possible extra correction resulting from the overvaluation (estimated in the model at 12%)
The impact of policy measures
(e.g. changes in the system of tax deductibility)
The possible impact of a continuing conversion of financial wealth into real estate
Looking forward
A ‘correction’ (about 10%), not a crash in 2013-2015...?
Since 2005, the amount of own funds used in the financing of transactions has increased, due to:
Fiscal amnesty operation in 2004 (EBA) resulted in repatriated capital partly being reinvested in Belgian real estate
The new tax regime 2005 led to more households taking out a mortgage loan just for tax reasons (limiting the amount borrowed to the level taken into account in the tax return)
Conversion of financial assets into real estate (especially new buildings), as property is still considered to be a ‘safe investment’ against the background of the financial crisis and an uncertain investment climate
Intergenerational transfers: (grand)parents giving financial support to their children, so they still can afford buying property
Average loan-to-value for the purchase of an existing house
60%
65%
70%
75%
80%
85%
0 50 100 150 200 250
Average mortgage loan size Average house price
Loan-to-value ratio (rhs)
‘000 EUR
Potential impact on macro-financial stability ?
Declining ‘average’ loan-to-value ratio…
Despite the decline in the macroeconomic LTV, the proportion of loans with a high LTV (>80%) remained stable at around 40%
Potential impact on macro-financial stability ?
...but not for everyone
The proportion of loans with an original maturity of > 20 years surged from 34% in 2007 to 45% in 2011
Potential impact on macro-financial stability ?
Increasing maturities of outstanding mortgage loans
20%
30%
40%
50%
60%
70%
80%
Total debt - Belgium Mortgage debt - Belgium Total debt - EMU
Belgium’s mortgage market
…does not point to excessive household debt
Household debt ratio (as a % of GDP)
0 10 20 30 40 50 60 70 80 90 100 110
2000 2012
Household mortgage debt
(as a % of GDP)
1,6%
1,7%
1,8%
1,9%
Arrears and unemployment
-5%
0%
5%
10%
15%
20%
25%
30%
5 5,5 6 6,5 7 7,5
Unemployment rate > 25 y (in %) Total amount mortgage arrears (yoy
%-change, rhs)
Default rate mortgage loans (arrears contracts as % of outstanding contracts)
Belgium’s mortgage market
…although the recession has hit credit quality (but not dramatically)
New production of housing loans (excl. refinancing, 3m moving average)
100.000 125.000 150.000 175.000
Purchase Construction
Purchase and renovation
Average amount per loan (6 month moving averages)
Belgium’s mortgage market
Average mortgage size over the top...
10 15 20 25 30 35
€ 1,0
€ 1,5
€ 2,0
€ 2,5
2007 2008 2009 2010 2011 2012 2013 Number ('000, rhs)
Total amount (bn EUR, lhs)
New production of housing loans (excl. refinancing, 3m moving average)
Belgium’s mortgage market
...and market growth is slowing down…
Outstanding amounts of housing loans
0%
2%
4%
6%
8%
10%
12%
14%
100 110 120 130 140 150 160 170
In billion EUR (lhs) yoy %-change (rhs)
10 15 20 25 30 35
€ 1,0
€ 1,5
€ 2,0
€ 2,5
2007 2008 2009 2010 2011 2012 2013 Number ('000, rhs)
Total amount (bn EUR, lhs)
5.000 10.000 15.000 20.000 25.000 30.000 35.000
House sales (*)
Construction permits granted Construction starts
Real estate activity (numbers, 4 m moving average)
(*) Ordinary houses, villas & apartments (*) Including renovation
Belgium’s mortgage market
...reflecting slower real estate activity
New production of housing loans (excl. refinancing, 4m moving average)
0 5.000 10.000 15.000 20.000 25.000 30.000 35.000
Loans existing houses (*) Loans new houses
-50 -25 0 25 50
Determinants credit conditions
Own financing costs Risk perception Competitors' pressure Credit conditions
-60 -40 -20 0 20 40 60 80
Change in credit conditions Change in credit demand
Tightening / decline (*)
Banks’ lending standards for housing loans (lending survey NBB)
tightening
Belgium’s mortgage market
Short term trend of credit conditions and credit demand
Summing up
Overvaluation not excessively high, price crash unlikely:
We estimate the Belgian housing market overvaluation at some 10%
Expectations for the fundamentals suggest a cumulated (‘cyclical’) price correction of about 10% in real terms (8% nominal) in 2013-2014
No major risk to macro-financial stability of the Belgian economy:
The house price boom in Belgium was not accompanied by a surge in house-building
Nor has there been an excessive debt accumulation by Belgian households
Lower prices in themselves will not affect people’s ability to repay their mortgages
Belgian housing market remains vulnerable to an interest rate and/or unemployment shock:
In the medium term, rising interest rates are the main risk for property prices and would also have an adverse (though probably limited) impact on the quality of the mortgage portfolio
For the quality of the mortgage loan portfolio, a surge in unemployment is a bigger risk, as some borrowers have been incurring increasingly higher debts in recent years
Belgian housing market characterised by an increasing ‘divide’:
On the one hand, there is a sizeable group of people that still can/wants to buy property at current price levels because they have own funds available to do so (as a result, the market is becoming slightly more speculative in nature)
On the other hand, housing has become less/no longer affordable for another large group of people. With no/limited amount of own funds, this group needs increasingly large mortgage loans to become homeowner (putting upward pressure on debt service levels), or will
increasingly find its way to the rental market
Summing up
28
