The Netherlands continues to see house prices surging

Today gives us the opportunity to look at several issues. Sadly the initial opening backdrop is this.

Dutch prime minister Mark Rutte announced yesterday that the Netherlands is going into “partial lockdown”, due to the sharp rising numbers of coronavirus infections. From Tuesday evening, all bars and restaurants will be closed for at least one month. Buying alcohol after 10PM is forbidden. Hotels remain open, as well as bars and restaurants in the airport, after the security check. ( EU Observer).

So we see that another squeeze is being put on the economy To put this another way the Statistics Netherlands report below from Monday now looks rather out of date.

The economic situation according to the CBS Business Cycle Tracer has become less unfavourable in October. However, the economy is still firmly in the recession stage. Statistics Netherlands (CBS) reports that, as of mid-October, 10 out of the 13 indicators in the Business Cycle Tracer perform below their long-term trend. Measures against the spread of coronavirus have had a major impact on many indicators of the Tracer.

If we look at the situation we see that it was a pretty stellar effort to have a reading of 0.56 in April but the number soon plunged to its nadir so far of -1.95 and the latest reading is -1.21.

The picture for trade, investment and manufacturing is as you might expect.

In August 2020, the total volume of goods exports shrank by 2.3 percent year-on-year. Exports of petroleum products, transport equipment and metal products decreased in particular. Exports of machinery and appliances declined as well.

The volume of investments in tangible fixed assets was 4.5 percent down in July 2020 relative to the same month last year. This contraction is smaller than in the previous three months and mainly due to lower investments in buildings and machinery.

In August 2020, the average daily output generated by the Dutch manufacturing industry was 4.0 percent down on August 2019. The year-on-year decrease is smaller than in the previous four months.

Along the way we see how this indicator was positive in April as some of it is lagged by around 3 months. That is also highlighted by the consumer numbers.

In July 2020 consumers spent 6.2 percent less than in July 2019. The decline is smaller than in the previous four months. Consumers again spent less on services but more on goods.

Unemployment

Yesterday’s official release told us that the unemployment data in the Netherlands are as useless as we have seen elsewhere.

In September 2020, there were 413 thousand unemployed, equivalent to 4.4 percent of the labour force. Unemployment declined compared to August and the increase seen in recent months has levelled off. In the period July through September, the number of unemployed increased by a monthly average of 3 thousand. From June to August, unemployment still rose by 32 thousand on average per month, with the unemployment rate going up to 4.6 percent.

There is a clear case for these numbers to be suspended or better I think published with a star combined with an explanation of the problem.

We do learn a little more from the hours worked data although as you can see they are a few months behind the times.

Due to government support measures, job losses were still relatively limited in Q2 at -2.7 percent, but the number of hours worked by employees and self-employed fell significantly and ended at a total of 3.2 billion hours in Q2 2020. Adjusted for seasonal effects, this is 5.7 percent lower than one quarter previously.

GDP

This was better than the Euro area average in the second quarter.

According to the second estimate conducted by CBS, gross domestic product (GDP) contracted by 8.5 percent in Q2 2020 relative to the previous quarter. The decline was mainly due to falling household consumption, while investments and the trade balance also fell significantly. Relative to one year previously, GDP contracted by 9.4 percent.

House Prices

Here we have something rather revealing and ti give you a clue it will be top of the list of any morning meeting at either the Dutch central bank or the ECB.

In August 2020, prices of owner-occupied dwellings (excluding new constructions) were on average 8.2 percent higher than in the same month last year. This is the highest price increase in over one and a half years.

Yes house prices are surging in a really rather bizarre sign of the times.

House prices peaked in August 2008 and subsequently started to decline, reaching a low in June 2013. The trend has been upward since then. In May 2018, the price index of owner-occupied dwellings exceeded the record level of August 2008 for the first time. The index reached a new record high in August 2020; compared to the low in June 2013, house prices were up by 51 percent on average.

This gives us a new take on the “Whatever it takes” speech by ECB President Mario Draghi in July 2012. Because if we allow for the leads and lags in the process it looks as though it lit the blue touchpaper for Dutch house prices. It puts Dutch house prices on the same timetable as the UK where the Bank of England acted in the summer of 2012 and the house price response took around a year.

The accompanying chart will also warm the cockles of any central banking chart as the house price index of 107.2 in September 2016 ( 2015 = 100) becomes 143.4 this August. Actually in the data there is something which comes as quite a surprise to me.

According to The Netherlands’ Cadastre, the total number of transactions recorded over the month of August stood at 19,034. This is almost 3 percent lower than in August 2019. Over the first eight months of this year, a total of 148,107 dwellings were sold. This represents an increase of over 5 percent relative to the same period in 2019.

More transactions in 2020 than 2019? I know such numbers are lagged but even so that should not be true surely?

Inflation

One might reasonably think that with all that house price inflation that inflation full stop might be on the march.

In September, HICP-based prices of goods and services in the Netherlands were 1.0 percent up year-on-year, versus 0.3 percent in August.

the answer is no because the subject of house price rises is ignored on the grounds that they are really Wealth Effects rather than price rises.That, of course throws first-time buyers to the Wolves. In fact if I may use the numbers from Calcasa first-time buyers can be presented as being better off.

On average, 13.6% of net household income was required to service housing costs in the second quarter of 2020, compared to mid-2008 when housing costs represented 27.0% of net income.

Such numbers have the devil in the detail as averages hide the fact that first-time buyers are being really squeezed.

Comment

The Netherlands is an economic battleground of our times.If we start with the real economy we see that there was a Covid-19 driven lurch downwards followed by hints of recovery. Sadly  the recovery now looks set to be neutered by responses to the apparent second Covid wave. The last quarter of 2020 could see another contraction.

Yet if we switch to the asset prices side the central bank has been blowing as much hot air into them it can. Bond prices have surged with bond yields negative all the way along the spectrum ( even the thirty-year is -0.21%), So we start with questions for the pensions and longer-term savings industry. Then we arrive at house prices which are apparently surging. You almost could not make that up at this time! The inflationary impact of this is hidden by keeping the issue out of the official inflation measure or if really forced using rents for people who do not pay rent. Meanwhile their other calculations include gains from wealth effects boosting the economy.

If we look forwards all I can see is yet another easing move by the ECB with more QE this time maybe accompanied by another interest-rate cut. I fail to see how this will make things any better.

 

The ECB bails out the banks yet again, the Euro area economy not so much

One of the battles in economics is between getting data which is timely and it being accurate and reliable. Actually we struggle with the latter points full stop but especially if we try to produce numbers quickly. As regular readers will be aware we have been observing this problem in relation to the Markit Purchasing Manager Indices for several years now. They produce numbers which if this was a London gangster movie would be called “sharpish” but have missed the target on more than a few occasions and in he case of the Irish pharmaceutical cliff their arrow not only missed the target but the whole field as well.

Things start well as we note this.

The eurozone economic downturn eased markedly
for a second successive month in June as
lockdowns to prevent the spread of the coronavirus
disease 2019 (COVID-19) outbreak were further
relaxed, according to provisional PMI® survey data.
The month also saw a continued strong
improvement in business expectations for the year
ahead.

As it is from the 12th to the 22nd of this month it is timely as well but then things go rather wrong.

The flash IHS Markit Eurozone Composite PMI rose
further from an all-time low of 13.6 seen back in
April, surging to 47.5 in June from 31.9 in May. The
15.6-point rise was by far the largest in the survey
history with the exception of May’s record increase.
The latest gain took the PMI to its highest since
February, though still indicated an overall decline in
business output.

Actually these numbers if we note the Financial Times wrong-footed more than a few it would appear.

The rise in the eurozone flash Composite PMI in June confirms that economic output in the region is recovering rapidly from April’s nadir as restrictions are progressively eased. ( Capital Economics )

Today’s PMI numbers provide further evidence of what initially looks like a textbook V-shaped recovery. As much as more than a month of (full) lockdowns had sent economies into a standstill, the gradual reopenings of the last two months have led to a sharp rebound in activity. ( ING Di-Ba)

The latter is an extraordinary effort as a number below 50 indicates a further contraction albeit with a number of 47.5 a minor one. So we have gone enormous contraction , what would have been called an enormous contraction if they one before had not taken place and now a minor one. But the number now has to be over 50 as the economy picks up and this below is not true.

Output fell again in both manufacturing and
services, the latter showing the slightly steeper rate
of decline

On a monthly basis output rose as it probably did at the end of last month, it is just that it is doing so after a large fall. The one number which was positive was still way too low.

Flash France Composite Output Index) at 51.3
in June (32.1 in May), four-month high.

For what it is worth the overall view is as follows.

We therefore continue to expect GDP to slump by over 8% in 2020 and, while the recovery may start in the third quarter, momentum could soon fade meaning it will likely
take up to three years before the eurozone regains
its pre-pandemic level of GDP.

Actual Data

From Statistics Netherlands.

In May 2020, prices of owner-occupied dwellings (excluding new constructions) were on average 7.7 percent up on the same month last year. This price increase is higher than in the previous months.

Well that will cheer the European Central Bank or ECB. Indeed ECB President Lagarde may have a glass of champagne in response to this.

 In May 2020, house prices reached the highest level ever. Compared to the low in June 2013, house prices were up by 47.8 percent on average in that month.

Staying with the Netherlands and switching to the real economy we see this.

According to figures released by Statistics Netherlands (CBS), in April 2020 consumers spent 17.4 percent less than in April 2019. This is by far the largest contraction in domestic household consumption which has ever been recorded by CBS. Consumers mainly spent less on services, durable goods and motor fuels; on the other hand, they spent more on food, beverages and tobacco.

If we try to bring that up to date we see that if sentiment is any guide things have improved but are still weak.

At -27, the consumer confidence indicator in June stands far below its long-term average over the past two decades (-5). The indicator reached an all-time high (36) in January 2000 and an all-time low (-41) in March 2013.

Moving south to France we were told this earlier today.

In June 2020, the business climate has recovered very clearly, in connection with the acceleration of the lockdown exit. The indicator that synthesizes it, calculated from the responses of business managers from the main market sectors, has gained 18 points, its largest monthly increase since the start of the series (1980).

The jump is good news for the French economy although the rhetoric above does not match the detail.

At 78, the business climate has exceeded the low point reached in March 2009 (70), but remains far below its long-term average (100).

The situation is even worse for employment.

At 66, the employment climate still remains far below its May 2009 low (73), and, a fortiori, its long-term average (100).

Oh and staying with France I know some of you like to note these numbers.

At the end of Q1 2020, Maastricht’s debt reached €2,438.5 billion, a €58.4 billion increase in comparison to Q4 2019. It accounted for 101.2% of gross domestic product (GDP), 3.1 points higher than last quarter, the highest increase since Q2 2019.

Just as a reminder the UK measuring rod is different and tends to be around 4% of GDP lower. But of course both measures will be rising quickly in both France and the UK.

Comment

Let me now switch to a speech given earlier today by Philip Lane of the ECB.

 Euro area output contracted by a record 3.6 percent in the first quarter of the year and is projected to decline by a further 13 percent in the second quarter. While growth will partially rebound in the second half of this year, output is projected to return to the level prevailing at the end of 2019 only at the end of 2022.

In fact all of that is open to doubt as the first quarter numbers will be revised over time and as discussed above we do not know where we are right now. The forecasts are not realistic but manufactured to make other criteria such as the debt metrics look better than otherwise.

Also there is a real problem with the rhetoric below which is the cause of the policy change which was the Euro area economy slowing.

Thanks to the recalibration of our monetary policy measures announced in September 2019 – namely the cut in our deposit facility rate, enhanced forward guidance, the resumption of net asset purchases under the asset purchase programme (APP) and the easing of TLTRO III pricing – sizeable monetary accommodation was already in place when Europe was confronted with the COVID-19 shock.

As that was before this phase he is trying to hide the problem of having a gun from which nearly all the bullets have been fired. If we cut through the waffle what we are seeing are yet more banking subsidies.

The TLTRO programme complements our asset purchases and negative interest rate policy by ensuring the smooth transmission of the monetary policy stance through banks.

How much well here was @fwred last week.

ECB’s TLTRO-III.4 : €1308bn The Largest Longer Term Refinancing Operation ever………Banks look set to benefit, big time. All TLTRO-III will have an interest rate as low as -1% between Jun-20 and Jun-21, resulting in a gross transfer to banks of around €15bn. Most banks should qualify. Add tiering and here you are: from NIRP to a net transfer to banks!

So the banks get what they want which is interest-rate cuts to boost amongst other things their mortgage books which is going rather well in the Netherlands. Then when they overdose on negative interest-rates they are bailed out, unlike consumers and businesses. Another sign we live in a bankocracy.

Apparently the economy will win though says the judge,jury and er the defence and witness rather like in Blackadder.

An illustrative counterfactual exercise by ECB staff suggests that the TLTRO support in removing tail risk would be in the order of three percentage points of euro area real GDP growth in cumulative terms over 2020-22.

Austria

I nearly forgot to add that Austria is issuing another century bond today and yes I do mean 100 years. Even more extraordinary is that the yield looks set to be around 0.9%.

The Investing Channel

 

 

The economic outlook for the Euro area looks even weaker

Today brings the economy of the Euro area into focus and to my mind yesterday brought us something to consider so let me hand you over to Statistics Netherlands.

In January 2019, prices of owner-occupied dwellings (excluding new constructions) were on average 8.7 percent higher than in the same month last year. The price increase was somewhat higher than in December 2018. This is evident from price monitoring of existing owner-occupied dwellings by Statistics Netherlands (CBS) and The Netherlands’ Cadastre, Land Registry and Mapping Agency.

This is a very familiar theme as we find that the era of low and in this instance negative interest-rates and QE bond purchases leads to higher house prices. We have looked at house prices in the Netherlands regularly over the credit crunch era so let us remind ourselves of the full scope and the emphasis is mine.

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. In May 2018, the price index of owner-occupied dwellings exceeded the record level of August 2008 for the first time. In January 2019, house prices reached the highest level ever.

Compared to the low in June 2013, house prices were up by almost 36 percent on average in January 2019, and 6.5 percent higher on average relative to the previous peak in August 2008.

There are various issues to consider here of which the first is simply timing. Different central banks responded in different ways to the credit crunch but house prices turning in the summer of 2013 is a rather familiar message. Also we note that the turn in house prices was driven by credit easing policies at this point as large-scale QE had not yet begun. From December 2011.

To conduct two longer-term refinancing operations (LTROs) with a maturity of 36 months and the option of early repayment after one year.

They amounted to around one trillion Euros and slowly we see in this instance the Netherlands housing market began to sing along with George Benson.

Turn your love around
Don’t you turn me down
I can show you how
Turn your love around

Why do central bankers love this? A speech from Peter Praet of the ECB last week gave us the two main reasons and he opened with the wealth effects.

Residential real estate (RRE) is the main component of euro area household wealth. Housing accounts for around 50% of asset holdings[2] and is largely financed through borrowing, with mortgages making up 85% of household liabilities

Then the fact that it supports “the precious”.

The corollary is a tight linkage between RRE prices and the balance sheets of the euro area banking sector. Mortgage loans account for between 40% and 90% of total lending by euro area banks to households across EU countries.

One way of looking at the problems of the Italian is to note that the balance sheets of the banks have not been helped by higher house prices for their mortgage balance sheets and troublingly in fact it is getting worse.

According to preliminary estimates, in the third quarter of 2018 the House Price Index (see Italian IPAB) decreased by 0.8% compared with both the previous quarter and the same quarter of the previous year (on annual basis it was -0.4% in the second quarter).

The linkage to the real economy was also provided by Peter Praet and at the moment he will be thinking of the positives in spite of the fact he looked at it in reverse here.

Falls in prices therefore affect the euro area business cycle through two main channels. First, by reducing households’ net wealth, which has decelerator effects on consumption[3], and weakening banks’ balance sheets through the decline in collateral and property values (the asset valuation channel); and second, by increasing the riskiness of households and of construction firms, prompting banks to tighten their lending standards (the credit risk channel).

Overall I guess he will be happy with this.

House prices rose by 4.3% in both the euro area and the EU in the third quarter of 2018 compared with the same quarter of the previous year.

This compares to a current consumer inflation rate of the order of 2.1% back then which does not seem to include house prices, can anybody think why? Let me help out by suggesting in central banker terms at least the other around 2% is wealth effects.

Returning to the monetary analysis theme and looking at the path of narrow and broad money growth it looks as though house prices move with broad money growth which is logical with the role of mortgage lending in overall bank lending. House prices may even move first perhaps in anticipation of policy moves as we have seen with bond yields and exchange rates.

Money Supply Trends

We have got used to falling numbers and today was no exception.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 6.2% in January from 6.6% in December…….annual growth rate of broad monetary aggregate M3 decreased to 3.8% in January 2019 from 4.1% in December 2018.

If we look at this as a broad sweep then M1 growth has fallen substantially from the 11.7% per annum peak of the summer of 2015 and the bounce to 9.7% in late 2017. Much of this has been a deliberate policy with the monthly QE tap having been reduced and then finally closed at the end of 2018. This has had an impact on the broader measure as well which has also been weakened by this.

The annual growth rate of short-term deposits other than overnight deposits (M2-M1) stood at -0.8% in January, unchanged from the previous month. The annual growth rate of marketable instruments (M3-M2) decreased to 0.4% in January from 0.9% in December.

Putting it another way M3 would be growing at an annual rate of 4% if only M1 was a factor and the wider measures reduced the annual rate of growth by 0.2%.

Comment

The narrow money supply measure proved to be an accurate indicator for the Euro area economy in 2018 as the fall in its growth rate was followed by a fall in economic (GDP) growth. It gives us a guide to the next six months and the 0.4% fall in the annual rate of growth to 6.2% looks ominous. A little relief comes from the fact that inflation has fallen although that may change as we note the recent rises in the oil price. Thus it looks like more of the same weak trend in the early part of 2018.

The broad money measure has declined but in proportionate terms by much less or to put it another way this is mostly the result of the end of QE. This poses a problem as we are reminded of the words of Mario Draghi.

certainly especially in some parts of this period of time, QE has been the only driver of this recovery.

Now we see that as it has ended in terms of monthly flow economic growth in the Euro area has slowed to a crawl. Whether it will slow further I do not know but we seem set for more weak growth in the early part of this year.

Meanwhile some have claimed that bank lending growth is supporting things as opposed to my view that it is a lagging indicator and has been representing the better times seen in 2017. I guess they will be quieter today as even lagging indicators work over time.

Annual growth rate of adjusted loans to non-financial corporations decreased to 3.3% in January from 3.9% in December.

Returning to my opening theme unless there is a change the outlook for house prices in the Euro area looks set for a turn.

 

 

How will the house price boom in the Netherlands respond to an economic slow down?

It has been a while since we have gone Dutch and taken a look at the economic situation in the Netherlands. The first point to note is that it has followed the Euro area trend for lower growth.

According to the first estimate conducted by Statistics Netherlands (CBS) based on currently available data, gross domestic product (GDP) expanded by 0.2 percent in Q3 2018 relative to the previous quarter. The growth rate was the lowest in over two years. Growth in Q3 was due to increased household consumption and international trade.

There is a difference here in that it managed to find some growth in trade as opposed to Germany where a decline pushed it into contraction in the latest quarter.  But in essence we are seeing yet again a consequence of the slow down of the Euro area monetary data feeding into economic activity. In the case of the Netherlands this came from a high base.

According to the first estimate, GDP was 2.4 percent up on the same quarter in 2017. Growth was mainly due to higher consumption. Investments in fixed assets and international trade also contributed, but less than in the previous quarter.

So we see that annual growth remains strong for now at least and that there has been a consumption boom.

In Q3, consumers spent over 2 per cent more than in Q3 one year previously. For 18 quarters in a row, consumer spending has shown a year-on-year increase.

A driver of this will be the strong employment situation.

Between August and October 2018, the number of people aged 15 to 74 in paid employment grew by an average of 20 thousand per month. Total employment stood at more than 8.8 million in October. Unemployment declined by an average of 4 thousand per month to 337 thousand.

Statistics Netherlands is harsh relative to others as it counts up to the age 75 got these purposes. Also it looks like the underemployment situation has improved too.

 The total unused labour potential in Q3 2018 comprised nearly 1.1 million people. This was almost 1.3 million one year previously.

This is not leading to a trade problem though although part of the good performance is not in line with the times.

Statistics Netherlands (CBS) reports that the total volume of goods exports grew by 5.1 percent in October relative to October 2017. Relative growth was higher than in September. In October 2018, exports of transport equipment, metal products, machinery and appliances increased most notably. The volume of imports was 4.4 percent up on October 2017.

The Netherlands must be the only place where transport equipment sales are up. Also not so many have trade volumes up right now. In terms of context we do need to note this though.

On balance, the Netherlands enjoys a goods trade surplus, i.e. exports exceeding imports. Re-exports play a significant role in the Dutch goods trade surplus. In 2016, approximately 36 percent of the surplus was caused by re-exports.

Looking Ahead

Yesterday the central bank the De Nederlandsche Bank (DNB) gave us its view.

While the economic boom is sustained, growth of the Dutch economy will slightly decelerate in the next few years. Growth in gross domestic product (GDP) is estimated at 2.5% for 2018, followed by 1.7% in 2019 and 2020.

Unlike in some Euro area countries that does qualify as a boom in these times. If we look back we see that since the 99.9 of the second quarter of 2013 GDP has risen to 112.2 where 2010=100. That also tells us that the Netherlands was pulled back by the Euro area crisis which preceded that.

The next bit is rather more uncomfortable, however.

Despite slightly lower growth figures, the Dutch economy will be running at full steam in the years ahead, with actual output exceeding its potential. Unemployment is set to remain very low. Households should benefit from a pick-up in wage growth, which will boost real disposable income in 2019 and 2020

It looks good but how is 1.7% growth “full steam” compared to this?

GDP growth peaked at 3.0% in 2017  and is estimated at 2.5% for 2018.

This is because central banks like to travel in a pack as we observe what is now their way of spinning their rather depressing view of our future.

It will recede to 1.7% in both projection years 2019 and 2020, approximating potential growth of around 1.6%, with the output gap widening from 0.3% in 2017 to 1.0% in 2018.

Sadly they never get pressed on this. After all they have interfered in so much of economic life with in this instance enormous QE and negative interest-rates but they seem to get a free pass on the issue of economic growth now being regarded as being likely to be lower than before. Even when Mario Draghi opens both the door and the window.

but certainly especially in some parts of this period of time, QE has been the only driver of this recovery.

Also even the slower growth future relies on something which has to now be in doubt.

In 2018, gross remuneration per employee in the business sector is set to regain momentum, growing by 2.3%. Our projections show that it will be 3.0% in 2019 and 3.8% in 2020, assuming the usual wage-price dynamics.

The emphasis was mine to highlight that no matter how often the output gap theory fails it comes back to life. No silver bullet seems to be pure enough to kill this vampire! Whereas if we continue to see an economic slow down then after a lag wage growth will presumably slow too rather than continue to pick-up. Although it would appear that should something like that happen an excuse is in place, what is Dutch for Johnny Foreigner please?

An alternative scenario featuring a downward correction in international financial markets sees the growth rate for emerging market economies – including China – deteriorate. This also affects the Dutch economy due to increasing risk aversion, slowing global growth and reduced confidence. Compared with our projections, this could send annual GDP growth 0.4 percentage points lower on average in 2019-2020.

House Prices

This will be on the video screens at the DNB and ECB Christmas parties,

In September 2018, prices of owner-occupied dwellings (excluding new constructions) were on average 9.3 percent higher than in the same month last year. The price increase was the same as in the previous month. This is according to the price index of owner-occupied dwellings, a joint publication by Statistics Netherlands (CBS) and the Land Registry Office (Kadaster).

This will raise a cheer and then boos.

House prices reached a record high in August 2008 and subsequently started to decline, reaching a low in June 2013.

Before the party really gets going again!

In May 2018, the price index of owner-occupied dwellings exceeded the record level of August 2008 for the first time; prices continued to rise and are at their highest level since the start of this price index in 1995. Compared to the low in June 2013, house prices were up by over 32 percent on average in September 2018.

Or in twitter terms 🍾👍

Comment

The economic going has been good in the Netherlands. Well unless you are a first-time house buyer watching prices accelerate away from you. But now even it must be wondering what 2019 will bring and how much of an economic slow down it will see? Just a continuation of the 0.2% quarterly economic growth just seen will tighten things up a bit and that happens with negative interest-rates and a ten-year bond yield of only 0.4%.

Yet some continue to churn out the line that interest-rates are going to be raised in the Euro area. I just do not get it.

 

 

 

 

 

 

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.

Comment

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.

 

 

 

The Netherlands house price boom is yet another form of bank bailout

It has been a while since we have taken a look at the economic situation in what some call Holland but is more accurately called the Netherlands. On a cold snowy morning in London – those of you in colder climes are probably laughing at the media panic over the cold snap expected this week – let us open with some good news. From Statistics Netherlands.

According to the first estimate conducted by Statistics Netherlands (CBS), which is based on currently available data, gross domestic product (GDP) posted a growth rate of 0.8 percent in Q4 2017 relative to Q3 2017. Growth is mainly due to an increase in exports. With the release of data on Q4, the annual growth rate over 2017 has become available as well. Last year, GDP rose by 3.1 percent, the highest growth in ten years.

Indeed the economic growth was something of a dream ticket for economists with exports and investments to the fore.

GDP was 2.9 percent up on Q4 2016. Growth was slightly smaller than in the previous three-quarters and is mainly due to higher exports and investments.

The trade development provides food for thought to those who remember this from 2015.

In a bid to boost trade links with Europe, on the back of the ‘One Belt, One Road’ initiative, the Port of Rotterdam has established a strategic partnership with the Bank of China,  (jpvlogistics )

The idea of Rotterdam being a hub for a latter-day Silk Road is obviously good for trade prospects although in terms of GDP care is needed as there is a real danger of double-counting as we have seen in the past.

Exports of goods and services grew by 5.5 percent in 2017……….Re-exports (i.e. exports of imported products) increased slightly more rapidly than the exports of Dutch products.

If we look back for some perspective we see that the Netherlands is not one of those places that have failed to recover from the credit crunch. Compared to 2009 GDP is at 112.7 which means that if we allow for the near 4% fall in that year it is 8/9% larger than the previous peak. Although of course annual economic growth of around 1% per annum is not a triumph and reflects the Euro area crisis that followed the credit crunch.

Labour Market

The economic growth is confirmed by this and provides a positive hint for the spring.

In January 2018, almost 8.7 million people in the Netherlands were in paid employment. The employed labour force (15 to 74-year-olds) has increased by 15 thousand on average in each of the past three months.

Unemployment is falling and in this area we can call the Netherlands a Germanic style economy.

There were 380 thousand unemployed in January, equivalent to 4.2 percent of the labour force. This stood at 4.4 percent one month previously………, youth unemployment is now at a lower level than before the economic crisis; last month, it stood at 7.4 percent of the labour force against 8.5 percent in November 2008.

After the good news comes something which is both familiar and troubling.

Wages increased by 1.5 percent in 2017 versus 1.8 percent in 2016. There was less difference between the increase rates of consumer prices and wages in 2017 than in the two preceding years.

Wage growth fell last year which of course is more mud in the eye for those who persist with “output gap” style economics meaning real wages only grew by 0.1%. 2016 was much better but driven by lower inflation mostly. So no real wage growth on any scale and certainly not back to the levels of the past. One thing that stands out is real wage falls from 2010 to 14 in the era of Euro area austerity.

House Prices

There were hints of activity in this area in the GDP numbers as we note where investment was booming.

In 2017, investments were up by 6 percent. Higher investments were mainly made in residential property.

Later I noted this.

and further recovery of the housing market.

So what is the state of play?

In January 2018, prices of owner-occupied houses (excluding new constructions) were on average 8.8 percent higher than in the same month last year. The price increase was the highest in 16 years. Since June 2013, the trend has been upward.

So much higher than wage growth which was 1.5% in 2017 and inflation so let us look deeper for some perspective.

House prices are currently still 2.0 percent below the record level of August 2008 and on average 24.8 percent higher than during the price dip in June 2013.

One way of looking at this is to add something to the famous Mario Draghi line of the summer of 2012 “Whatever it takes” ( to get Dutch house prices rising again). What it means though is that house prices have soared compared to real wages who only really moved higher in 2016 due ironically to lower consumer inflation. Tell that to a first time buyer!

Wealth Effects

This view has been neatly illustrated by Bloomberg today as whilst the numbers are for Denmark we see from the data above that they apply in principle to the Netherlands as well.

Danes have another reason to be happy: they’re richer than ever before………After more than half a decade of negative interest rates, rising property values in Denmark have left the average family with net assets of 1.9 million kroner ($314,000), according to the latest report on household wealth.

Er……

The last time Denmark enjoyed a similar boom was in 2006

If we switch back to the Netherlands its central bank published some research in January as to how it thinks house price growth has boosted domestic consumption.

From 2014 onwards, house prices have been steadily climbing again. The coefficient found for the Netherlands implies that some 40% of cumulative consumption growth since 2014 (i.e. around 6%) can be attributed to the increase in real house prices.

We can take the DNB research across national boundaries as well at least to some extent.

The first group comprises the Netherlands, Sweden, Ireland, Spain, the United States and the United Kingdom, and the second group includes Italy, France, Belgium, Austria and Portugal.

In economic theory such a boost comes from a permanent boost to house prices which is not quite what we saw pre credit crunch.

Between 2000 and 2008, average real house prices went up by 24% in the Netherlands. Between 2008 and 2014, as a result of the financial crisis, they went down again by 24%.

Debt

This is an issue in the Netherlands.

 As gross domestic product (GDP) rose more sharply than debts, the debt ratio (i.e. debt as a percentage of GDP) declined, to 218.8 percent. Although this is the lowest level since 2008, it is still far above the threshold of 133 percent which has been set by the European Commission.

If we look at household debt.

After a period of decline, household debts started rising as of September 2014, in particular the level of residential mortgage debt. The latter increased from 649 billioneuros at the end of September 2014 to 669 billion euros at the end of June 2017.

There is also this bit highlighted by the DNB last October.

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. Such loans could cause frictions, for example if households are forced to sell their home at the end of the loan term.

Comment

There are a litany of issues here as we see another example of procyclical monetary policy where and ECB deposit rate of -0.4% and monthly QE meet economic growth of around 3%. This means that in spite of the fact that real wages have done little house prices have soared again. The problem with the wealth effects argument highlighted above is that much if not all of it is a wealth distribution and who gave the ECB authority to do this?

Those who own homes in a good location have it made. While other people – especially people who rent their homes and people with bought homes in less favorable locations – fall behind. ( NL Times)

Those who try to be first time buyers are hit hard but a type of inflation that does not appear in the CPI numbers.

The truth is that the biggest gainers collectively are the banks. Their asset base improves with higher house prices and current business improves as we see more mortgage borrowing both individually and from the business sector. We moved from explicit bank bailouts to stealth ones as we see so many similar moves around the world. Banks do not report that in bonus statements do they? This time is different until it isn’t when it immediately metamorphoses into nobody’s fault.