While we were still experiencing the after-effects of the COVID-19 pandemic, we were confronted with new developments. There was an unexpected sharp rise in inflation, mainly triggered by the rise in energy prices, caused by the war in Ukraine. These events have had a significant impact and have left policymakers with a number of tough challenges. Stagflation risks are looming large, owing to high inflation, the war in Ukraine and the potential for wage-price spirals. The most pressing monetary policy task is to restore low and stable inflation, while minimising the costs of economic activity and preserving financial stability. The European Central Bank (ECB) is tightening monetary policy by accelerating the phasing out of support packages and increasing policy interest rates.
Inflation 2021-2022 (CPI)
Source: Statistics Netherlands
Vesteda Housing Market Indicator, actual as per Q4 2022
Vesteda Housing Market Indicator, Q1 2019 - Q4 2022
Vesteda developed the HMI and this provides an overview of the most relevant drivers on the Dutch housing market from a residential investors perspective. The latest score of 5.4 in Q4 2022 is significantly lower than the scores in previous years, reflecting the current market turbulence. The sharp decline is primarily due to low consumer confidence, the high level of inflation and ongoing pressure on affordability. Furthermore, economic growth is levelling off and there has been a slight increase in the unemployment rate, despite ongoing shortages on the labour market.
Mortgage interest rate vs government bond yield NL (10 years)
Source: IEX, BLG wonen
The housing market showed clear signs of cooling and we are seeing lower transaction prices. This is mainly due to rising interest rates and further increased real estate transfer tax. However, price levels on the owner-occupier market are only slightly lower and the housing market remains tight, which is shown by low supply-demand ratios. On the rental market, prices continue to rise but the increase in the total cost of living due to high energy prices remains a serious matter of concern. Furthermore, the rise in construction costs is putting pressure on the feasibility of new building projects and sustainability measures in existing buildings. The rise in construction costs and interest rates combined with various additional requirements and regulations has led to a decline in the number of building permits. This suggests that building production will be reduced in the coming years. Since there are no signs of a decline in demand from tenants, the pressure on the housing market will increase in the upcoming years, pushing up market rents.
The political debate on the affordability of housing and calls for the regulation of the mid-rental segment have been continuous since 2018, and this intensified due to an overheated housing market.
In May 2022, the government introduced legislation to change the WWS points system, which was originally the system for determining the rents of government-regulated social housing. This change limits the part of the WOZ value (fiscal value) to a maximum of 33% in the WWS points system, resulting in lower maximum initial rents in the most pressured markets for regulated or ‘social’ homes. The Dutch government also increased the transfer tax rate for investors from 8% to 10.4%, effective as per 1 January 2023.
The government then announced additional regulation for 2024, extending the regulated segment for new rental contracts to 187 WWS points, equivalent to a rent of around €1,000 per month. Additional incentives for quality and sustainability will be incorporated, which increases the number of points for a house. Furthermore, the calculation of the annual rent increase changed. This will now be linked to wage growth (agreed in collective labour agreements), if it is lower than inflation (CPI). There is another proposal from the Minister to link rent indexation entirely to wage growth, however, it is uncertain whether this will be implemented.
The above measures will of course impact Vesteda. Where possible, we will mitigate part of the impact, for example by investing in the quality and sustainability of our homes. We will continue with our strategy of investing in affordable and sustainable homes. At the same time, we will prepare our portfolio and asset strategies for upcoming changes.