News reports about the housing market have become almost boring in recent years. House prices through the roof. Starters don’t have a foot in the door on the hysterical housing market. Prices for owner-occupied homes at the highest n… – ‘yes yes yes’, thought many a reader at the umpteenth message, ‘now we know’.
Until last week there was suddenly talk of hyperboles with the opposite effect: ‘Rapid cooling’, ‘biggest drop ever’, ‘all signals are on red‘. After nine years of virtually uninterrupted price increases, there was the first real downward trend, real estate association NVM announced. On average, house prices fell by 5.8 percent in the third quarter of this year compared to the previous quarter. In comparison: between 2008 and 2013, the value of houses fell by about 20 percent.
It was already anticipated that something would happen to prices: rising mortgage rates, increasing inflation and uncertainty about energy bills made the affordability of an owner-occupied home a problem for more people. “But I didn’t expect such a sharp drop,” says emeritus professor of housing market Johan Conijn (University of Amsterdam). What does the rapid price drop mean? Is there still a housing shortage in a cooled market? And four other questions about house prices.
1 Why are prices falling so fast?
Such a rapid fall in house prices as last quarter is unusual. It usually takes a while before a changing sentiment really seeps through in prices. This is due to so-called loss aversion, says Conijn: the psychological resistance of owners to accept a lower price. They are usually only prepared to do so when a house has been on the market for a long time. “Now that has apparently happened on a large scale.”
How is that possible? Jasper du Pont, who uses data to research the housing market, suggested: on Twitter that it may be due to the massive overbidding of recent times. His theory: Because houses have been put on the market for a relatively low price, with the aim of attracting many viewers who bid against each other, owners have become accustomed to asking prices below market value. As a result, they are now quicker to accept a lower offer.
To illustrate: a house worth 150,000 euros was perhaps put on the market for 140,000 euros on the advice of the real estate agent. In the old overwrought situation, a seller received 154,000 euros for it, now 145,000 – still a fine, acceptable amount for the seller. Certainly because it will be considerably more than he paid for it himself, if the house was bought some time ago.
Conijn finds it a plausible explanation. Due to the many overbidding, the value of a home had become very diffuse, he says. “Sellers were constantly surprised by what was still being offered. As a result, they may no longer have such a clear picture of what a home is worth.” But the real cause of the price drop, he says, is of course the increased mortgage interest and energy costs. These lead to higher monthly costs, while people can borrow less, at a time that is already financially uncertain: for example, the demand is declining.
2 Do falling prices mean that the housing shortage is diminishing?
The price of a home is determined by what a buyer can currently pay for a home, says Piet Eichholtz, professor of real estate financing at Maastricht University. Now that affordability is under pressure due to high mortgage rates, the price is falling. “Then a new equilibrium is found, at a lower price. And that sparks a new question,” says Eichholtz. The house price is therefore not only determined by demand, but also influences it.
The current housing shortage is in principle separate from this. This includes looking at the growth in the number of households, the expected migration and housing needs. “It is not asked: for what price are you willing to live in a house?”, says Eichholtz. “In that sense, the deficit is a bit of a strange concept, because it ignores the price mechanism.” Still, he thinks it is useful to quantify the housing shortage. “It gives an idea of what the demand is, now and in the future. That way you know what to build and develop.”
The real cause of the price drop is of course the increased mortgage interest and energy costs
According to the most recent forecast by research agency ABF Research, which calculates the deficit, there are now 315,000 homes short. That is 3.9 percent of the total housing stock. To bring the deficit to an acceptable 2 percent, according to economists, 150,000 homes would need to be added at this point. In order to meet the demand in the future, more than 1.2 million new homes will be needed over the next fifteen years.
Also read: Are a million homes needed? It can also be less, or more
3 What are the consequences of falling prices for new construction?
Those are not good. Revenues are falling, while construction costs have risen sharply since the corona crisis; production then came to a temporary halt. New-build projects are therefore more difficult to get profitable. The new-build market will be somewhat closed, Eichholtz expects. “Private investors are watching the cat out because they expect bargains to come, institutional investors are pulling out and private buyers are waiting too.”
A construction project usually only gets off the ground if there are enough end users – residents in other words. And new construction is no longer sold so quickly, the NVM reported last week. In the third quarter of this year, a third fewer new-build homes and building plots were sold than in the same quarter last year. Buyers are hesitant because of the economic uncertainty: they don’t know what their situation will be like in two or three years, when the house is finished and they get the key. Moreover, new construction is relatively expensive, half of them cost more than five tons.
“When project developers put a project in the freezer, it doesn’t mean they will never continue with it, but it does mean that it will be later and at different prices,” says Eichholtz. “Then there will be renegotiations with builders.”
Also read: Ambitious building ambitions. But are they feasible?
4 What social consequences do falling prices have?
Owner-occupiers – 60 percent of households – are generally not happy with price drops. But because the value of houses has risen so fast in recent years, most people will not be flooded (the mortgage debt is then greater than the value of the house). The group to whom this may possibly apply consists of people who have just bought their first home. This only affects them if they have to move, for example because of a divorce. According to a calculation by De Nederlandsche Bank (DNB), 8 percent of homeowners would be under water if house prices fell by 20 percent.
But falling house prices also affect those who do not have to move. “What happens on the housing market is macroeconomically important,” says Conijn. When prices fall, owner-occupiers keep their hands on the purse strings – a psychological effect. As a result, consumption falls, leading to economic contraction. DNB is afraid of that. This poses risks to financial stability, which is already at stake due to inflation, high interest rates and economic uncertainty. DNB warned that if households can no longer afford their mortgage – for example because their fixed-rate period ends and they suddenly receive higher monthly payments – banks will also run into problems. They are therefore required by DNB to hold more capital.
Also read: DNB: Risk that households will not be able to meet mortgage obligations is increasing
5 Can first-time buyers buy a house again?
Starters will be happy with a price drop. However, the turnaround in the housing market does not mean that it is more attractive for them to buy a house. In that case, the fall in prices would first have to compensate for the increased mortgage burden. The interest rate is now more than 4 percent, compared to 1.4 percent at the beginning of this year. That means: considerably higher monthly costs, and less allowed to borrow. The lending standards will be tightened even further next year. While prices are still strong due to the enormous increases in recent times. On average, a home now costs 425,000 euros. This combination of factors makes it more difficult than easier to buy a house. But starters do get a foot in the door sooner: some of the house hunters have dropped out. So less competition.
6 Will we have another housing crisis?
ABN Amro thinks that house prices will fall by 2.5 percent next year. ING comes to 4.5 percent. Whatever the outcome, the situation is different from the previous housing crisis, says Conijn. At its lowest point in 2013, one million households were under water. “Back then you could borrow 120 or 130 percent of the value of a home without having to pay off. That made households extremely vulnerable to declines.” Those top mortgages no longer exist. “There are repayments and the loans are much smaller: maximum the value of a house.”
Eichholtz doubts that prices will collapse completely. Because of inflation, he explains, the real interest rate is actually “extremely negative”: after all, the amount you borrow today has shrunk the day after tomorrow, if you adjust it for inflation. It is therefore financially very advantageous to take out a mortgage, he reasons. “People just don’t think that way, they’re not used to inflation yet.”
Conijn puts things into perspective. “The housing market is extremely volatile,” says Conijn. “For most people, a crisis is simply a matter of waiting for better times.”