RESIDENTIAL
Keypoints
- Transaction prices fall sharply due to higher interest rates
- Rents also down, vacancy rate lowest ever
- Investment market activity remains limited
- Initial yields fall slightly, gap with interest rates narrows further
- Clarity about new upper limit middle rent segment
House prices drop sharply
In the owner-occupied housing market, the average transaction price fell sharply in the third quarter. Figures from the NVM show a quarterly drop of 5.8 per cent; viewed on a year-on-year basis, there is still an increase of 2 per cent. In almost all regions transaction prices fell; only four northern regions saw a (slight) increase. An important factor in the price declines is the rising mortgage interest rate which has resulted in less borrowing room for households. And then there is the economic uncertainty. The number of transactions was stable compared to the same period last year. As supply increased 22 per cent in the third quarter, the tightness indicator widened from 2.1 to 2.8, the highest level since 2019. The number of homes being outbid continues to decline; on average, bids were 3 per cent above the asking price. The NVM figures are based on the average transaction price and provide a rough but current indication of house price development.
The price index of existing houses of CBS and Kadaster gives a better indication, because it corrects for location and house type. In August and September, the price index declined by 0.2 and 0.7 per cent, respectively, from the previous month. Due to high inflation and rising mortgage interest rates, the Home Ownership Market Indicator fell further to 85 points in August (100 is “neutral” on a scale of 0 to 200). This is the first time since early 2014 that this indicator has shown this low a reading.
KEY INDICATORS Q3 2022
INDEX OF PURCHASE AND RENTAL PRICES (2010=100)
Source: Kadaster, MSCI, Oxford Economics (2022), edited by Syntrus Achmea
Rents also down, vacancy rate lower than ever
Measured based on transactions, in the deregulated rental sector, rents per square meter (bare) decreased 3.1 per cent in the third quarter compared to the second quarter. The average leased area increased slightly from 77 to 79 square meters, which partly explains the decline. On an annual basis, the rent increase was substantial at 7.5 per cent. The number of rental transactions remained stable compared to the second quarter, but declined by 8.4 per cent compared to a year earlier.
Market rents of homes owned by institutional investors were 4.4 per cent higher in the second quarter compared to a year earlier, compared to the first quarter the growth was 1.2 per cent. Within the G4, in the second quarter rents rose the fastest in The Hague by 1.4 per cent, in Rotterdam rent growth was the lowest at 0.6 per cent. Vacancy in complexes leased by institutional parties fell further to 1.5 per cent. Since the MSCI series began in 2008, vacancy rates have never been this low. Third quarter figures will be available later (source: MSCI).
FINANCIAL VACANCY RATE OF RENTAL HOUSING
Source: MSCI (2022), edited by Syntrus Achmea
Investment market activity remains subdued
Transaction activity in the investment market was again limited in the third quarter of 2022. Preliminary figures from RCA show a quarterly volume of 721 million euros. This is the third quarter in a row that less than a billion euros has been invested in Dutch residential properties. At 2.3 billion euros, investment volume in the first three quarters of 2022 is 30 per cent lower than in the same period last year. Due to the uncertainty surrounding rent regulation as well as economic developments, investors continue to wait and see. In addition, rising interest rates are causing investors to offer less, especially investors working with debt capital. Activity by institutional investors, who mainly buy new construction, was at its lowest in the past ten years in the first three quarters. On top of the uncertainty mentioned earlier, investing in new construction has become more difficult due to rising construction costs, problems with nitrogen and lengthy planning procedures.
RESIDENTIAL INVESTMENT VOLUME BY QUARTER (X € BLN.)
Source: RCA (2022), edited by Syntrus Achmea
Yields creep up, government bond yields rise rapidly
Prime initial yields in the Netherlands' major housing markets rose by an average of 0.05 percentage points for the second quarter in a row (source: C&W). As the risk-free rate advanced to well above two per cent, the spread fell further to around one per cent. This is similar to the levels we saw prior to 2009, before government interest rates began to fall. When the spread between government bonds and initial yields remains this low over the long term, initial yields will rise because of the risk premium demanded by investors. Average initial yields of rental properties owned by institutional investors remained almost stable at four per cent in the second quarter of 2022 (source: MSCI). Third-quarter figures will be available later.
PRIME YIELDS
Source: C&W, MSCI (2022), edited by Syntrus Achmea
A new rental segment provides clarity
At the end of September, the Minister of Housing and Spatial Planning announced more details about the regulation of middle rental prices. The upper limit of middle rent regulation will be at or around 187 WWS points, corresponding to a rent of around 1,000 euros. The Affordable Housing Program (May 2022) had already announced that the minister wanted to regulate middle rental housing. At the time, the plan was to raise the liberalisation limit to a rent between 1,000 and 1,250 euros. This bandwidth caused a lot of uncertainty among investors; they did not know where they stood.
With the upper limit of 1,000 euros, the minister is now opting for the lower end of the aforementioned bandwidth. A house that is below this limit based on the number of WWS points will be regulated and receives rent protection and a rent corresponding to the number of WWS points. Houses with around 187 points or more will remain in the free sector, which has no rent limitation.
The minister confirmed that the regulation will only take effect with new leases (mutation or first rental), incumbent tenants will keep the agreements in their rental contracts. In addition, there will be a form of allocation for middle rental housing so that they are actually occupied by middle-income households; details on this are still lacking. The regulation of middle rent would take effect January 1, 2024. By setting the upper limit, the minister will create clarity in the market. As a result, acquisitions can be calculated more accurately and investors will broadly know where they stand. The cap of around 1,000 euros will enable institutional investors to add sustainable rental housing to the Dutch housing stock. The exact details of the regulation will be announced in November 2022.
With the announcement of the upper limit of the middle rental, a new regulated rental segment of up to 1,000 euros will be created alongside social rent (with a monthly rent of up to €763.47) and the free sector. Incidentally, it is also possible that properties with more than 187 points will have a monthly rent below 1,000 euros, for example larger properties in smaller towns outside the Randstad.
ONE SPACE - DELFT
Source: Syntrus Achmea
Outlook
In the coming months, house prices are likely to continue to fall. The high interest rates, combined with the announced (stricter) Nibud standards further limit the borrowing capacity of households. The high expected wage development this year will possibly provide a dampening effect, but uncertainty about a further rise in interest rates persists. In the investment market, there is now clarity about the upcoming rent regulation, but uncertainty about high interest rates remains. Upward pressure on initial yields continues and investment volumes will be low. In the rental market, scarcity remains noticeable, production of (rental) housing continues to lag, and uncertainty in the market is causing households to prefer renting over owning. As a result, rental prices continue to rise and vacancy rates remain low. Despite all these uncertainties, the economy continues to perform well with low unemployment. A severe recession is therefore unlikely for the time being.