Residential
Keypoints
- House prices fall for third quarter in a row
- Tightness in rental market continues
- Activity in investment market remains limited
- Initial yields rise, gap with risk-free rate grows again
- Construction costs continue to rise
Decline in house prices continues
House prices continued to fall in the first quarter of 2023. Figures from the NVM show a 3.6 per cent quarter-on-quarter decline in the transaction price of existing owner-occupied houses, this is similar to the decline in the fourth quarter of 2022. Overall, house prices have fallen over 12 per cent in three quarters since the peak in mid-2022. The number of transactions fell 2 per cent in the first quarter compared to a year earlier. Although supply fell slightly, the tightness indicator rose from 3.2 in the fourth quarter to 3.3 in the first quarter. Most homes are now being sold at or below the asking price, with only 3 out of 10 still being outbid. A year ago, this was 8 out of 10. In the new-build market, the number of sales remained at a similar level to the fourth quarter of 2022, at 3,900 homes, though sharply lower than the more than 6,000 a year earlier. High construction costs have limited scope to correct prices and developers are finding it difficult to sell new-build homes to buyers facing increased financing costs. With investors also buying less new construction, many projects are delayed.
The NVM figures are based on the average transaction price and give a rough but up-to-date indication of house price developments. The price index of existing owner-occupied houses (PBK) from CBS and the Land Registry gives a more accurate, but delayed indication. The first-quarter figures are not yet known, but Oxford Economics expects the PBK to fall 4.3 per cent in the first quarter. The Eigen Huis market indicator remained stable in March at 73 points (100 is 'neutral' on a scale of 0 to 200).
INDEX OF HOUSING AND RENTAL PRICES (2015=100)
Source: Kadaster, MSCI, Oxford Economics (2023), edited by Syntrus Achmea
Rents rise due to tightness
Market rents of homes owned by institutional investors were 3.4 per cent higher in the fourth quarter than a year earlier, up 0.6 per cent compared to the third quarter. Vacancy rates in complexes rented out by institutional parties remained stable again at around 1.5 per cent. The low vacancy rate shows the continued tightness for rental properties in the freehold sector. Due to limited new construction activity and the effects of the proposed mid-rent regulation, this tightness is expected to continue. First-quarter figures for both rents and vacancies are not yet known at the time of writing (source: MSCI).
RIJNVLIET - UTRECHT
Source: Syntrus Achmea
Slow start to investment market
Investment activity in the first quarter of 2023 was limited. Preliminary figures from RCA show an investment volume of 0.6 billion euros. This volume will increase as more transactions from the first quarter become known. The transaction volume in the first quarter is always relatively low, but activity seems to be even lower this year than in previous years. Activity is also expected to remain relatively low in the coming quarters. Increased interest rates and subsequent price corrections are causing investors to adopt a wait-and-see attitude. As selling parties have limited willingness or ability to drop the price, bid and ask prices are out of sync.
RESIDENTIAL INVESTMENT VOLUME BY QUARTER (X € BLN.)
Source: RCA (2023), edited by Syntrus Achmea
Correction in initial yields continue
Initial yields for rental properties (prime, Amsterdam) rose sharply by 25 basis points in the first quarter compared to the fourth quarter. Compared to a year earlier, the increase was 70 basis points (source: C&W). The risk-free rate fell slightly in the first quarter, increasing the spread. Average initial yields on rental properties owned by institutional investors rose sharply by 20 basis points in the fourth quarter of 2022 and are now at similar levels to mid-2021 (source: MSCI). First-quarter figures will be available later, but given the trend in prime yields, a further rise seems almost certain.
PRIME YIELDS
Source: C&W, Oxford Economics, MSCI (2023), edited by Syntrus Achmea
Construction costs continue to rise
Although house prices are falling and investor interest has waned, construction costs continue to rise. IGG's construction cost index rose 1.1 per cent in the first quarter of 2023 compared to the fourth quarter of 2022. On a year-on-year basis, the increase was 8 per cent. Labour costs rose sharply in the first quarter due to a 2.5 per cent wage hike in the construction collective bargaining agreement, in addition, the price of concrete rose 13 per cent. The declining interest in new construction among both investors and private home buyers is visible in the falling number of building permits. As a result, construction companies are facing declining work stocks. IGG expects more space in the market later this year, possibly stabilising construction costs.
INDEX OF CONSTRUCTION (2007=100)
Source: IGG (2023), edited by Syntrus Achmea
Outlook
House prices will remain under pressure in the coming months. Although mortgage rates appear to be stabilising, the expectation in the market is that house prices will continue to fall for several more quarters. Rising salaries and low unemployment will limit the decline. Bank forecasts so far point to declines of around 5 per cent year-on-year, but much will depend on monetary policy. The rental housing market continues to perform well, with limited supply will keep demand in all price segments. As a result, vacancy rates will remain low and market rents will rise. In the investment market, upward pressure on initial yields will continue due to rapidly rising interest rates. Many institutional investors are now overweight in real estate and financing property acquisitions with debt is almost financially impossible. Therefore, investment volumes are not expected to increase sharply in the short term.