Well, that wasn’t too bad. The price falls for homes lasted exactly four quarters, and now the market is already recovering. And then we are only talking about price developments compared to a year ago. If you look at prices compared to the previous quarter, there was only a price drop for three quarters and the market started to rise again from mid-2023.
This is remarkable when you consider that the European Central Bank rapidly and sharply increased its interest rates from the summer of 2022. The so-called deposit interest rate went from 0 percent to 4 percent in just over a year. There has not been such an abrupt increase for decades.
The housing market therefore looked vulnerable. The rising inflation, which the ECB fought against, and the rising ECB interest rates themselves, both had an impact on rising interest rates on long-term government loans. And the rising interest rates on government loans lead to rising mortgage interest rates that banks charge home buyers.
Those higher mortgage rates would make even more homes unaffordable than already existed. Because house prices were already high. Just take a look. Wherever you place the start of an international comparison of the increase in house prices, the Netherlands always ends up in the highest regions. Here you can see the comparison since 1995:
As you can see, many people who found themselves in hot water geopolitically, nuclearly, climatologically or otherwise, bought houses in New Zealand, although this has now severely limited the influx of refugee foreign home buyers. But apart from that: the Dutch housing market could also benefit from it. So why not a scrap date?
Economists from the major banks have many good explanations for this. The disposable income per household has increased considerably, partly because more hours are worked on balance. This apparently provides sufficient purchasing power to put a floor in the housing market. Moreover, the shortage on the housing market is so great that new buyers often have to.
There are more reasons and one of them is especially important: in practice, mortgage interest rates increase much less quickly than it seems. The interest on mortgages, especially in the Netherlands, is fixed for a long time. This means that the interest rate on the ‘stock’ of mortgages has hardly increased – only when fixed interest rate periods expire, new, higher interest rates came into effect.
On average, the interest rate on the stock (term of five years or more) rose from a low of 2.25 percent in the summer of 2022 to 2.55 percent now. That is 0.3 percentage points. The average interest rate on comparable new mortgages has now risen from 1.53 percent to 3.7 percent. That is 2.2 percentage points.
Economists from De Nederlandsche Bank published a beautiful graph about this at the end of last year. You can see this here for the Netherlands, supplemented with the most recent data from the ECB’s MIR database.
It is important for the housing market that buyers are often allowed to take their old mortgage with them. They are therefore not affected by higher interest rates, because their existing low interest rates are still fixed for them. The currently higher interest rate on new mortgages only applies to additional borrowed money.
This makes it clear that the increased interest rate does not have much of an effect at all. Not yet. Only if interest rates remain high for a long time will he move into more and more existing mortgages whose fixed-interest period is expiring. But if mortgage rates soon drop again, it may seem like little more than a bad dream.
The limited effect of the interest rate increase on the housing market now points to a much larger and more disturbing phenomenon. The effect of central banks’ interest rate policy on the economy appears to be decreasing across the board. The International Monetary Fund paid attention to this last month in its World Economic Outlook. The pass-through of central bank official interest rates to other interest rates is slower and less than before, the IMF says.
How does that happen? The ‘transmission’ of monetary policy to the real economy is currently being studied intensively. The fact is that economic growth in the eurozone has not suffered so much from the sharp increase in interest rates since the summer of two years ago. And the American economy doesn’t seem to care at all.
There are also reasons for this, including the enormous support measures from the American government that are still taking effect. But still, a decade ago, central banks worried that they were powerless, as if they were ‘pushing against a string’, as they tried to boost what was then dangerously low inflation. Is the same thing happening to them now while they are fighting excessive inflation?
Finally, just because it is possible, let’s take a look at the Dutch house prices, now since 1970. Even if you correct for inflation – after all, everything is becoming more expensive, including houses – you see how strongly the market has risen. And by the way, you see that the housing crisis of the late 1970s and early 1980s is still the biggest.
