Roads to recovery, chapter 3: Markets at risk: Housing market

• Volatility in house prices has important consequences for the rest of the economy.
• High mortgage debts have forced over a million Dutch households into the red. Their negative home equity will severely constrain their mobility and possibly their consumption.
• Nominal house prices are expected to grow between -0.5% and 4% annually.

The housing market has played a key role in the current crisis and will play an important role in shaping the coming recovery. The number of households under water will be reduced by increasing in house prices, which stimulate consumption rather than savings.

The decline in the US housing market that started in 2005 contributed to a sharp increase in delinquencies in residential mortgage loans. Eventually, the decline led to large losses on subprime mortgage loans and escalated into a global banking crisis and a global economic recession. Difficulties in housing markets have not been confined to the US. In the Netherlands, house prices have dropped by more than 20% since their peak in 2008 and nearly 30% in real terms. Investment in housing has also been hit hard. After Ireland and Spain, the Netherlands has seen the biggest drop in the investment-GDP ratio in the euro area, falling from about 6.5% in 2006-2008 to under 4% in 2013.

Such booms and busts are typical for housing markets. They are characterised by largely fixed stocks in the short-run, which only slowly adapt to changing market conditions. This implies that short-term price fluctuations can be substantial. House price volatility has important consequences for the rest of the economy.

A distinctive feature of the current housing market crisis is that the number of households with an underwater mortgage has tripled. Over a million households currently have a mortgage worth more than the home it is secured against. Their negative home equity will severely constrain their mobility and possibly their consumption. Negative equity is concentrated among younger owners. Two-thirds of homes with negative equity have owners younger than 45, with people under 40 the worst affected. Although the amount of homes with negative equity is relatively high compared with other countries, mortgage delinquencies are very low.

The recovery of the Dutch housing market depends on many factors. We identify three key uncertainties that will most likely shape the developments in the Dutch housing market over the next ten years. The future behaviour of households who currently have negative equity constitutes the first key uncertainty in the Dutch housing market. Because of negative equity many of them will find it very difficult to buy another house in the coming ten years. The second key uncertainty relates to the availability of mortgage lending. While lending standards have been tightened, their future developments over the next ten years are uncertain and they may tighten further. Finally, consumers’ confidence in the Dutch housing market will also play a key role. Given these uncertainties, nominal house prices are expected to grow between -0.5% and 4% annually.