Welcome to the Netherlands house price boom 2018 version

As many of the worlds central bankers enjoy the delights of the Jackson Hole conference it is time for us to look what might be regarded as a measuring stick of their interventions. To do so we travel across the channel and take a look at the housing market in the Netherlands which was described like this on Tuesday.

In July 2018, prices of owner-occupied houses (excluding new constructions) were on average 9.0 percent higher than in the same month last year. The price increase was slightly higher than in the preceding months. House prices were at an all-time high in July 2018, according to the price index of owner-occupied houses, a joint publication by Statistics Netherlands (CBS) and the Land Registry Office (Kadaster).

So we see an acceleration as well as an all-time high in price terms and it is hard not to have a wry smile at this being the nation must famous for Tulips. Anyway for those who have not followed this particular saga it has been far from a story of up,up and away.

House prices reached a record high in August 2008 and subsequently started to decline, reaching a low in June 2013. The trend has been upward since then.

The timing of the change is a familiar one as that coincides pretty much with the turn in the UK. Although the exact policy moves were different his provokes the thought that central bankers were thinking along not only the same lines but at the same time. Of course there were differences as for example the Bank of England introducing the house price friendly Funding for Lending Scheme and Mario Draghi announcing “Whatever it takes ( to save the Euro) in the summer of 2012, followed by a cut in the deposit rate to 0% at the July meeting. As to synchronicity it was raised at the ECB press conference.

And my second question is: China also cut rates today and we had further stimulus from the Bank of England. We were just kind of wondering about, you know, how much coordination was involved. Was there any sort of contact between you and the People’s Bank of China and the Bank of England?

Actually the ECB move was more similar to the Bank of England’s actions than in may have first appeared as it too was subsiding the “precious”

 One is the immediate effect on the pricing of the €1 trillion already allotted in LTROs.

That sort of thing tends to lead to lower mortgage interest-rates so let us move onto the research arm of the Dutch central bank the DNB.

Average mortgage interest rates charged by Dutch banks have been declining for some time. Between January 2012 and May 2018, average rates fell by around two percentage points.

Actually the fall was pretty much complete by the autumn of 2016 and since then Dutch mortgage rates have been ~2.4%. That pattern was repeated in general across the Euro area so we see like in the UK mortgage rates were affected much more by what we would call credit easing ( LTROs etc in the Euro area) than by QE which inverts the emphasis placed on the two by the media. Also slightly surprisingly Dutch mortgage rates are higher than the Euro area average which according to the DNB are topped and tailed like this.

Rates vary widely across the euro area, however, with the lowest average rates currently being charged in Finland (0.87%) and the highest in Ireland (3.11%).

In case you are wondering why we also get an explanation which will set off at least some chuntering amongst Irish readers.

Households in Finland tend to opt for mortgages with a short fixed interest period, in which the rates are linked to Euribor. Irish banks charge relatively high margins when setting mortgage interest rates.


Saving the Dutch banks?

You may wonder at the mimicking of Mario Draghi’s words but if we step back in time there were plenty of concerns as house prices fell from 120.9 for the official index in August 2008 to 95 in June 2013. Consider the impact on the asset base of the Dutch banking sector is we add in this from the DNB.

Almost 55% of the aggregate Dutch mortgage debt consists of interest-only and investment-based mortgage loans, which do not involve any contractual repayments during the loan term. They must still be repaid when they expire, however.  ( October 2017).

Actually it was worse back then.

. Since 2013, the aggregate interest-only debt has decreased by over EUR 30 billion, and it currently stands at some
EUR 340 billion………. Between 1995 and 2012, virtually none of the mortgage loans taken out involved any contractual repayments during the loan term.

Also back then it was permitted to have loans of more than 100% of the value of the property so the banks faced lower house prices with an interest-only mortgage book some of which had loans larger than the purchase price. What could go wrong?

Several years ago, the economic
slowdown and the housing market correction were mutually reinforcing.

As to the level of debt well that is high for the Dutch private sector according to the DNB.

 In the third quarter of 2017, household and corporate debt came to 106% and 120% of GDP respectively, which is high from an international perspective.


The “Whatever it takes” saga is usually represented as a move to bail and indeed bale out places like Greece,Ireland, Portugal and Spain and that was true. But it is not the full story because some northern European countries had previously behaved in what they would call a southern European manner and the Netherlands was on that list. We have seen already how the central bank described the housing markets troubles as being in a downwards spiral with the overall economy so let us see if that is true on the other side of the coin. Now house prices are booming what is going on in the economy?

According to the first estimate conducted by Statistics Netherlands (CBS) based on currently available data, gross domestic product (GDP) expanded by 0.7 percent in Q2 2018 relative to the previous quarter…….According to the first estimate, GDP was 2.9 percent up on the same quarter in 2017.  ( Statistics Netherlands )

How very British one might say. If you were thinking of areas in the economy affected by the housing market well……

Output by construction companies showed the strongest growth in Q2 2018………Investments in residential property, commercial buildings, infrastructure and machinery increased in particular.

Also higher house prices and possible wealth effects?

In Q2, consumers spent well over 2 percent more than in Q2 one year previously. For 17 quarters in a row, consumer spending has shown a year-on-year increase.

So the housing market turned and then consumption rose. Of course correlation does not prove causation and other factors will be at play but should Mario Draghi read such numbers his refreshing glass of Chianti will taste even better.

Is this an economic miracle? The other side of the coin is represented by Dutch first time buyers who will be increasingly squeezed out especially in the major cities. There we see something familiar as international investors snap up property ahead of indigenous buyers just like London and so many other cities have seen. The official story is familiar too as they are told because of lower mortgage rates affordability is fine but of course the capital burden relative to income rises and that matters more in a country where interest-rate only mortgages are still 40% of new borrowing. At least most borrowing seems to be fixed-rate now but more fundamentally as we look at this we see a familiar refrain which is can any meaningful rise in interest-rates be afforded now? On that road we see why Mario Draghi has kicked any such discussion into the lap of his successor.




16 thoughts on “Welcome to the Netherlands house price boom 2018 version

  1. Suomessa, no one here is taking up Nordea’s interest rate collar / cap whilst Euribor is -0.15%. That .87% average is mostly the banks 1.2% margin. Why pay the equivalent of 4.5% for 5 to 7 years, when ECB rates are NEVER going higher than 1.97% 😉

    btw – what will happen to the rest of Europe, when Germany comes out of recession and Euribor tanks?

    • Hi farnesbarnes

      Well it is cheap I give you that and Mario seems set on keeping official Euro interest-rates where they are for at least the next year. So you are picking up a type of carry each year nothing happens. If you can jump ship to a fixed-rate before any major change then you will have done well but of course that is an if.

      One bonus is that the margins of the Finnish banks are relatively small. Is there a particular reason for that?

      • Historically, ’bout 10 years back, there was some aggressive competition with margins as low as 0.3%. They’ve gradually upped to a level at which the market can’t really take any more. The new 15% equity requirement has put the brakes on the housing market a touch over the past 6 months too.

    • Hi Jason

      Andrew has replied but it hasn’t linked through. For myself I was wondering about the cow statistics as when my late father was alive my parents lived in Farnham. I used to go running on the army land nearby when I was there and a local nature group hit on the idea of using cows to control the vegetation. As a town boy/man I had rarely been up close and personal with cows and did wonder about the safety element. One time one of the bulls charged along the top of the escarpment there which made me wonder more. I was always likely to be able to run away but even for a runner you could get caught out by a short burst.

      Anyway ironically it was the cows safety which ended things as what they ate was affected by the metals from the army shells etc and several died before they were removed.

    • Sorry, Jason, I saw Shaun’s comment and it seems that my link didn’t work. I have had problems with these lately. I was trying to link to a paper in the August 1987 issue of the International Statistical Review: “Bortkiewicz’s Data and the Law of Small Numbers”. You could google it if you like. The deaths from cows dataset would probably have interested von Bortkiewicz. Besides cavalrymen kicked to death by horses he analyzed data on child suicides. It wasn’t so much that he took a special interest in morbidity rates, but he wanted to find examples of rare occurrences that were still considered sufficiently important to have official statistics on them, and these often related to death.

    • Suspect the increased sales of waistcoats at M&S during the World Cup will win this year. The Love Island one is just too depressing.

  2. Thank you for the entertaining link, Jason. The stat about the number of people killed by cattle in Britain every year made me think of the Russian-born statistician von Bortkiewicz using the number of soldiers killed by horse kicks in the Prussian army to illustrate his Law of Small Numbers:
    The Australian authors of the paper I linked to believe that von Bortkiewicz was unjustly accused of crooking his data to make it fit a Poisson distribution. Let’s hope so. A pity that, like so much academic research now, their paper is protected behind a paywall, but I suppose Quine and Seneta feel they have a right to be paid for their work.

  3. I have a question please. The central banks do most of the economics for any government and the EU does most of the rest. So, what exactly are national governments for? You can change MEP’s I suppose but that changes nothing and who voted to put central bankers in charge of anything?

    As I see it we’re all governed in near identical ways by technocracy. No wonder we all have the same problems.

    • Hi bill40

      They have some flexibility which Germany is exhibiting at the moment in a rather Germanic way.

      “Net lending of general government amounted to 48.1 billion euros in the first half of 2018 according to provisional results of the Federal Statistical Office (Destatis). When measured as a percentage of the gross domestic product at current prices (1,671.8 billion euros), this is a surplus ratio of 2.9%.”

      In another way we will find out more from what the present Italian government is able to do or will the life be squeezed out of it like what happened with Tsipras and co in Greece?

      • Remember Spain?
        Big enough to say, “No!” and get away with it.”
        Typical actions of a bully, pick on the small guy.

  4. This backs my view that the northern European liquidity trap level is around 2-2.5% so the rate cutting has set off an asset boom with an initial but rapidly disappearing rise in consumption. Of course each market is affected by structural and fiscal conditions, but happen it will (albeit on nothing like the UK scale where the trap level is about 4% and fiscal support is just silly). Like the UK, it will run out of steam eventually (I was interested to see just today that my late mother’s house is reckoned by Zoopla to have dropped 2% in value since we sold it and for some reason, it has disappeared from Rightmove without any SSTC strap for a few months). This damages consumption, because that capital has to be paid back some day, so as the asset markets turn down as the Fed tightens, there will probably have to be a push in Holland for additional savings to avoid the endowment policy issues we have here,

    Of course, Holland will not have the hot Russian cash issues we have – except that now we are cracking down on them (ha, ha).

    • Hi David

      A few of the Dutch property articles I took a look at were mentioning foreign buyers in the main cities and who know what sort of a can of worms that will eventually turn out to be? Oh and Kevin below is curious how you calculate the UK’s liquidity trap to be 4%?

    • I first came across the liquidity trap in the Economics unit of my MBA, which I was studying in 2001 and it intrigued me as it seemed to explain why rates below a certain level did not aid consumption, but ramped asset prices, especially houses. The economic orthodoxy was stated as rates just a shade above 0%, based on the Japanese experience in their first lost decade of the 1990s. When I was a new grad in the mid-80s, we had lived through the early 80s recession, when rates had hit 11% and then the village idiot Lawson cut them too quickly in his policy of shadowing the DM. The result was a mix of consumption boom and rising house prices, but seeing M3 growth at 25% in March 88, it was obvious to me that rates would rise, jobs would go and house prices would fall – off I went to South America for 3 1/2 months while rates duly went up 2%. It made me a critic of loose money and Lawson in particular. So, i was thinking about this in the run-up to the Economics exam when rates were falling worldwide after the Al Quaeda attacks of 2001. It was obvious to me that another housing bubble was coming (dot.coms came and went rather quicker!), but UK rates had never been near 0%.

      Obviously, there were structural and fiscal reasons for housing bubbles in the UK at higher rates, especially various tax dodges, but it was still kicking in way above 0%. The euro was just getting going at the time and in 2003, I was in Austria, when I was asked why we hadn’t joined – I did explain in my poor German that some of it was down to the Inselaffen (the Germans call us ‘island apes’) attitudes, but I then had to use English to explain that the real problem was that a bubble was starting and if we joined the euro, we would be cutting rates further to just pour petrol on the fire. We have operated on rates against the euro (and to some extent the DM, although generally higher levels made it larger) of a premium of 1.5-2% and it is the structural house price issue in my view, which creates this premium. In 2003, it was 3.75% against 2% and our bubble took off, while there was no sign of it in Europe, but for similar structural reasons, Club O’Med were showing similar signs to us. Rates only reached 5% in November 2006 in a belated bid to head off disaster and it was all too late a year later https://www.bankofengland.co.uk/boeapps/iadb/Repo.asp

      If you then reckon that money supply effects take about 18 months, then the fall below 4% in November 2008 takes you to mid-2010 when prices began to pick up after the 2009 15% correction. Rates under Lawson bottomed at 7.4% – at the 18 month mark, they peaked at nearly 15% and the house price falls kicked were getting serious in 91, so that 18 month rule does work well.

      If you look at the euro rate, although the ECB did cut to 1% in 09 (when we were already down at 0.5% or 2-2.5% below the usual GBP/euro premium) they did raise rates to 1.5% in 2011 https://tradingeconomics.com/euro-area/interest-rate but then headed towards 0% when the problems got underway in northern Europe amid many Germans saying rates were too low.

      Of course, the BoE chooses to hang on to the old orthodoxy of 0%, just to avoid any responsibility for house price rises and the tanking of consumption GDP. But then I did go to South America while Lawson’s idiotic policies hit the buffers.

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