MORTGAGES
Keypoints
- Swap rates and mortgage rates rise further
- Sharp drop in mortgage applications for mortgage refinancers, buyers apply for more
- Mortgage amount closed at peak; mortgage amount applied for now lower
- House prices fall sharply
- Number of foreclosure auctions barely increases
Interest-rate market
The third quarter of 2022 saw a significant rise in swap rates for all maturities of the swap curve. Swap rates with maturities of up to 10 years rose on average by 119 basis points. For longer maturities, interest rates rose by an average of 58 basis points. The 5-year interest rate rose from 1.79% to 2.97%. The 10-year interest rate rose from 2.17% to 3.08%. The 30-year interest rate rose from 1.98% to 2.40%. The swap curve flattened at the short end of the curve. The difference between 10-year and 5-year interest rates has narrowed: from 37 basis points at the end of the second quarter to 11 basis points at the end of the third quarter. The negative difference between the 30-year interest rate and the 10-year interest rate has widened. While the difference at the end of the second quarter was -0.18%, it was -0.68% at the end of the third quarter. That makes the 30-year swap rate lower than the 10-year swap rate and the curve inverse after the 10-year swap.
Interest rates rose again in the third quarter. Persistent high inflation has prompted central banks worldwide to raise the policy rate. Although the market had hoped falling inflation would bring an end to interest-rate hikes, inflation remained high in developed economies, causing central banks to raise the policy rate again. Central banks have taken unprecedented steps to curb inflation. The Federal Reserve (Fed) raised the policy rate by 150 basis points in the third quarter. In Europe, the ECB raised the policy rate by 125 basis points in the third quarter. Because of persistent high inflation, the consensus is that interest rate moves will be even larger. There is even talk of unprecedented further interest rate moves of 100 basis points. Since central banks started the tightening cycle, the Fed has raised the policy rate by 3.25% and the ECB has raised the policy rate by 1.25%. Persistent high inflation and expectations of more policy-rate hikes has led to rising interest rates in the third quarter.
EURO SWAP CURVE
Source: Syntrus Achmea
Mortgage rates and margins
After having already risen sharply in the first and second quarters of 2022, Mortgage rates rose again in the third quarter. However, the increase in the past quarter was far less than in the second quarter. The average rate (based on the top ten providers) for a 10-year fixed-rate mortgage with a national mortgage guarantee (NHG) rose from 3.37% to 3.82%. The margin on mortgages in this segment decreased in the third quarter, from 142 to 87 basis points. The average rate for a 30-year top mortgage (i.e. a mortgage with an LTV > 90%) rose from 4.36% to 4.56% during the past quarter. The margin also decreased (compared to swap) in this segment. The margin on these mortgages declined by 65 basis points from 238 to 173 basis points. The rise in mortgage rates follows the rise in swap rates, though with some delay. At the start of the past quarter, swap rates were temporarily lower before rising again in August and September. September’s rise, in particular, has not been fully reflected in mortgage rates yet. This also explains the significant decrease in margins.
MORTGAGES RATES
Source: Syntrus Achmea
SPREADS (IN BPS)
Source: Syntrus Achmea
Sharp drop in applications by those refinancing their mortgage, buyers apply for more
According to the Land Registry, the number of mortgages taken out since June has slowly declined from a three-month average of about 45,000 to a three-month average of about 41,000 mortgages (source: Dutch Land Registry, adapted by Syntrus Achmea). The number of mortgage applications provides a more up-to-date picture of the consumer mood in the mortgage market. The number of applications in the third quarter fell by 14% compared to last year. The decrease was mainly caused by a sharp drop in the number of people refinancing their mortgage. The share of this type of mortgage applications fell by almost 32% year-on-year. Despite rising interest rates and economic and political uncertainty, buyers’ applications notably increased by over 5% in the past quarter. The target groups of first-time buyers and those moving up the housing ladder with a national mortgage guarantee (NHG) applied for many more mortgages than the previous quarter (source: Mortgage Data Network – HDN).
NUMDER OF MORTGAGES AND MORTGAGE AMOUNT (3 MONTH MOVING AVERAGE)
Source: IG&H, Dutch Land Registry (2022)
Mortgage amount taken out at its peak; mortgage amount applied for is now lower.
Based on mortgages taken out, the average mortgage amount continued to rise to over €480,000 in July and August. The fall in the number of mortgages taken out caused the total mortgage amount to fall to €13.6 billion (source: Dutch Land Registry). HDN observed a decrease in the mortgage amount applied for in the third quarter. Among buyers, the loan to income decreased from 4.44 to 4.08 and the average loan to value was 75.1% (source: Mortgage Data Network – HDN).
In the second quarter, there were relatively large shifts in the mortgage providers’ market share. The banks’ share fell from 52.0% to 51.3% and the insurers’ share dropped sharply from 14.8% to 12.0%. The strongest risers were the mortgage funds whose market share increased from 22.6% to 25.8% (source: IG&H).
MARKET SHARE
Source: IG&H (2022)
House prices fall sharply
The average transaction price in the owner-occupied market fell sharply in the third quarter. The figures of the Dutch Association of Real Estate Brokers and Real Estate Experts (NVM) show a 5.8% quarter-on-quarter decline, while the year-on-year figures still show a 2% rise. Transaction prices fell in almost all regions, with only four northern regions showing a slight increase. A major factor in these falling prices is the rising mortgage rates which leave home buyers with increasingly less borrowing ability. And then there is still economic uncertainty. The number of transactions was stable compared to the same period last year. As supply increased by 22% in the third quarter, the scarcity indicator increased from 2.1 to 2.8, its highest level since 2019. The number of homes selling above asking price continues to decrease, with homes being sold for 3% above their asking price on average. The NVM figures are based on the average transaction price and provide a rough but up-to-date indication of house price developments. The price index of existing owner-occupied homes of Statistics Netherlands (CBS) and the Dutch Land Registry is a more reliable indicator as it makes an adjustment for the location and type of home. In August and September, the price index fell by 0.2% and 0.7%, respectively, from the previous month. Because of high inflation and rising mortgage rates, the Owner-Occupied Market Indicator fell a further 85 points in August (100 is ‘neutral’ on a scale of 0 to 200). This is the indicator’s lowest reading since early 2014.
Number of foreclosure auctions barely increases
There has been little change in the number of foreclosure related auctions on a three-month moving average. The number of foreclosures, which rose slightly to an average of 22 per month, is still historically low. This number could rise in the coming months because of rising monthly costs. High energy bills and increased daily expenses could cause payment problems for some financially vulnerable households. The government’s energy cap and measures to restore purchasing power will not be reflected in purchasing power until the end of 2022 and early 2023. The increase in the limit for an NHG mortgage from €355,000 to €405,000 in 2023 also reduces the risk of potential payment problems.
NUMBER OF FORECLOSURE AUCTIONS (3 MONTH MOVING AVERAGE)
Source: Dutch Land Registry (2022), edited by Syntrus Achmea
Outlook
Mortgage rates will adapt (with some delay) to the swap rate. If swap rates rise, mortgage rates will rise accordingly, but with some delay. If swap rates fall, mortgage rates will also fall, though with some delay. Mortgage rates are expected to continue to rise, in response to increased swap rates in the third quarter. We also expect an increase in margins compared to the end of the third quarter due to the delayed reaction of the mortgage market to the capital market. Several banks have revised house price development forecasts for the final months of 2022 and 2023 downwards in the past quarter. Increased mortgage rates and political and economic uncertainty have already caused PBK prices to stabilise and NVM prices to fall in recent months. Whether this trend continues to strengthen or weaken in the quarters ahead depends partly on the effects of measures to restore purchasing power and interest-rate developments. Low unemployment and the large housing shortage remain positive pillars for the housing market.