Housing Market Monitor - Recession and interest rate risk affect housing market outlook

Summary:

The economic outlook is deteriorating rapidly. Inflation is rising due to higher energy prices. The increase is also threatening to become embedded in inflation expectations, so that the inflation rise, which is temporary on paper, may become permanent. This is all the more true as inflation expectations are rising. The latter is something that worries central bankers. They are preparing to tighten monetary policy by purchasing fewer financial debt securities and raising official interest rates. This translates into a rise in interest rates on government loans, which is accompanied by higher mortgage rates. Thus, the years of sustained decline in mortgage rates are behind us. This has repercussions on the housing market, as mortgage interest rates are a determining factor in determining the amount that can be borrowed for house purchases.

Higher mortgage rates will translate into a decrease in the number of transactions. These will be more difficult to achieve if sellers have a high selling price in mind and buyers are unable to pay this price due to a lack of access to finance. This friction will initially lead to a drop in the number of transactions and an increase in the stock of houses for sale, something that has already been visible in recent months. In our previous publication, we assumed that the number of transactions would fall by 15 per cent this year and stabilise next year. In view of the decline so far, the growing economic problems in the second half of the year and the struggles in the construction sector, this is probably too positive an assumption. We are therefore revising our estimate to -17.5 percent this year and -2.5 percent next year.

In the second instance, with some delay, the price development will follow. For now, the price index of the Land Registry is still rising extremely fast, by 18.8 per cent year-on-year in May. But there are signs of change. There is still a lot of outbidding, but not by as much as before. We assume that the rise in prices will slow down. The average increase will be 15 percent this year and 2.5 percent next year. Previously, we assumed 12.5 and 5 percent respectively. The reason for the increase this year is that the realisations so far are pulling up the annual average. Next year, there will be no such 'luxury'. Due to higher interest rates and the threat of recession, the annual average will be much lower. Also in the following years, the price development will be moderate, because the loss of purchasing power leaves less room for mortgage expenditure. The Nibud will further tighten the income lending standards. In combination with higher mortgage interest rates, this means that homebuyers will be able to borrow less.