Vesteda Housing Market Indicator, actual per Q4 2019
Source: Vesteda
The Dutch housing market appears to be finding a new balance
The housing market indicator was relatively stable in 2019. However, the Dutch housing market can still be characterised as a seller’s market. Housing prices are flattening out in some regions but prices in general are still rising faster than the long-term average inflation rate. This situation is influenced by high demand and low supply due to historically low mortgage rates, low construction numbers, a favourable economic situation, etc. The so-called nitrogen crisis, which is due to the failure to meet European regulatory requirements on nitrogen emissions, is putting even more pressure on supply.
On the other hand, there are some signs that the housing market is shifting into a lower gear. Homes are sitting on the market for longer periods and economic growth is slowing. In addition, despite the fact that consumer confidence has barely changed, we did see a slight deterioration in the overall opinion of Dutch consumers on the economic climate and their willingness to buy. It is not yet certain how these developments will evolve, but domestic economic risks have become more top of mind.
Vesteda Housing Market Indicator, Q1 2018 - Q4 2019
Source: Vesteda
Economy
Dutch economic growth is slowing in line with the average decline across Europe, but continues to outperform the European average. Macro-economic uncertainties such as US trade policy, Brexit and the state of the Chinese economy all had a negative impact on economic growth in 2019. Economic growth, measured in GDP, declined to 1.7% in 2019 from 2.0% in 2018.
Unemployment has now fallen to below the level before the economic crisis. However, consumer confidence remained in negative territory for most of 2019, driven by overall economic expectations and the financial situation over the past year. On top of this, inflation climbed to 2.6% in 2019, mainly due to the increase in the VAT rate and the additional increase in energy taxes at the start of 2019.
The outbreak of the coronavirus (COVID-19), starting late 2019 in China and today still spreading around the world, is expected to have a severe impact on the Global and Dutch economy. At this point (18 March 2020), it is too early to determine the exact impact. The aforementioned growth rates were published well before the corona crisis.
Housing
Dutch house prices are still rising, albeit at a slower pace, mainly driven by record low interest rates and fact that supply is lagging ever-rising demand. House price rises are levelling off in some regions, but prices in general are still on the rise. While the prices of owner-occupied homes have been rising well above inflation for years, and at the same time are subject to more fluctuations, we have seen a stable increase of 1% to 3% above inflation in the rental market.
Inflation vs. house prices (rental and owner occupied)
Source: Statistics Netherlands
The tightness of the housing market in terms of market liquidity is at an all-time high. The growing demand for affordable housing, the scarcity of new locations, long lead times for developments, limited capacity and rising production costs are also affecting the housing market.
Although the Dutch housing market has become more volatile than we have seen in recent years, the fundamentals for both domestic and international investors remain strong. Investment volumes in the residential real estate investment market hit a new record of €9.3 billion in 2019 (Source: Capital Value). International investors accounted for close to half (46%) of total investment volume last year. The scarcity of supply and heavy demand for residential real estate have resulted in significant compression in gross initial yields over the past year.
Sustainability
The effects of climate change became even more visible in 2019. It will be a major challenge to keep the increase in average global temperatures to below 2 °C, and even more so to the preferred increase of 1.5 °C. The Dutch government has set a target to reduce annual CO2 emissions by at least 49% by 2030 compared with 1990, and to reduce emissions even further by 95% in 2050. Despite the efforts made under the auspices of global climate treaties, from the Kyoto protocol to the Paris agreement, CO2 concentrations in the atmosphere have continued to increase.
Increase in CO2 emissions
Source: NOAA, Earth System Research Laboratory, edited by Vesteda
The built environment has a major impact on greenhouse gas emissions and the changing climate. We saw this effect in 2019 come to a head in the so-called nitrogen crisis, which was due to the Netherlands’ failure to meet European regulatory requirements on nitrogen emissions. To reduce nitrogen pollution, the government introduced a project plan which involves additional requirements for building permits, including no nitrogen emission during the development of the project. As a consequence, building projects were delayed or even put on hold completely due to restrictions on nitrogen risks.
At the same time, institutional investors are devoting considerable attention to sustainability issues, something that is clearly reflected in overall GRESB scores. Dutch non-listed residential real estate investors scored an average of 76 points in 2019.
Consumers
In 2019, the population of the Netherlands grew by an estimated 132,000 people to a total of over 17.4 million. This growth was at a faster pace than over the previous three years, mainly driven by people from abroad settling in the Netherlands.
Due to the population growth and the persistent lag in housing supply, prices have increased sharply in recent years, especially in the owner-occupied segment and also in the rental segment. This has made it difficult for lower and middle-income earners to find suitable and affordable homes in some cities. These people tend to earn too much to qualify for government-regulated social segment homes and owner-occupied homes have become too expensive. As a result, the housing expense ratio of free market rental homes has increased. We are seeing more signals that middle-income home seekers have limited options in the larger cities and pensioners are increasingly facing affordability issues due to limited or even no indexation of pensions.
Net rental expenses (% net disposable household income)
Source: Statistics Netherlands. 2019 figure is not available yet.
On top of this quantitative pressure, the qualitative mismatch on the Dutch housing market is becoming a more prominent attention point. This is mainly due to a demographic shift. The number of people aged 75 and above is set to grow sharply in the period to 2030, which will also result in a substantial increase in the number of single households.