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The Dutch residential market

Demand for housing remains high

The current housing shortage is approximately 315,000 homes (Primos, 2022), which amounts to 3.9% of the total housing stock. The shortage is expected to persist due to the growing number of households and a lack of residential building projects being completed.

In 2022, the net addition of homes was a little over 71,500 and remains below the annual minimum target of 100,000 homes. Due to rising construction costs and national legislation (including legislation related to nitrogen emissions), the construction of approximately 25,000 new homes has been delayed or put on hold (Capital Value, 2022). The number of new permits being issued is also declining. As a result, new supply is not expected to keep up with demand in the coming years. Without new measures to stimulate new construction, the number of completions could drop to 40,000 to 50,000 in 2024 and 2025 (Capital Value, 2022). The shortage will therefore only increase.

Figure 8: Annual Net additions of new homes

Number of homes

Sources: CBS, 2022

Residential market reached a tipping point in 2022

Since February 2022, mortgage interest rates have increased significantly. At the end of 2022, the 10-year fixed mortgage interest rate was around 4.0%, compared to 1.5% at the beginning of the year. This increase impacts the amount of mortgage debt home buyers can take on and consequently the height of their bids.

Prices of owner-occupied homes still increased during the first half of 2022 and began to decline in August. Between August and December, prices declined by almost 5.0% (CBS, 2022). The annual growth rate in December was 2.7% year-over-year (CBS, 2023). If we look only at Q4, prices declined by 3.7%, while the growth rate dropped to -6.4% compared to Q4 of 2021 (NVM, 2023). Looking ahead, all major banks in the Netherlands (DNB, Rabobank, ING and ABN Amro) expect housing prices to further decline in 2023 by a range between -2.5% to -3.1%.

Substantially lower investor demand and high risk premiums for potential buyers

As a result of the increasing interest rates and the upcoming national regulation of the mid-priced rental sector, investor interest in the Dutch residential market has decreased strongly since May 2022. This trend is expected to continue in 2023, putting upward pressure on gross initial yields (GIY). MSCI data showed a stabilisation of GIY in Q2 2022 and slightly rising yields in Q3 2022 of 10bps, whereas Capital Value reported an increase in GIY of 10bps in Q2 and 20bps in Q3 2022. In Q4, Capital Value reported another 20bps increase in yield levels in residential real estate.

Among potential buyers, the perception of risk has increased. The 10-year government bond level stands at approximately 2.5%, while the current risk premium for investment in residential property stands at about 1.3%, down from 3.5% at the end of 2021. This seems insufficient considering the rising risks. This is expected to lead to relatively strong upward pressure on yields which started in Q4 2022.

The investment volume in residential real estate remained high during 2022 at about €7.7 billion (Capital Value, 2023). This is slightly higher than in 2021. However, most deals were already in progress in 2021 and at the beginning of last year. As of the summer of 2022, investor activity has declined, which is also expected to lead to lower investment volumes in 2023.

Figure 9: Price development (nominal) existing owner-occupied homes 2019-2022

In percentage

Source: CBS, 2023

Figure 10: Investment volume

In € billion

Source: Capital Value, 2022

Figure 11: Gross initial yields 

In percentage

Source: MSCI, 2022

Political environment and expected law and legislation

The Dutch government and local authorities are seeking to address and tackle the issue of housing affordability and the shortage of mid-prices rental homes.

Annual rent increases limited

The Dutch government has approved the plan to link annual contractual rental growth in the residential market to wage growth instead of inflation for 2023. A new law is being prepared where rental growth differentiation for rental sector will be introduced.

New law and legislation for the mid-priced sector

The Minister of Housing and Spatial Planning announced the proposed regulation of the mid-priced rental sector, effective January 1, 2024. The WWS points system will be used to determine which units will fall within the mid-priced rental sector. The threshold will be 187 points, meaning that rental income of all units up to 187 will be capped at the maximum reasonable rent as determined in the WWS. The legislation will be applicable to new leases only. The WWS will be modernised on several fronts. Most importantly, sustainable real estate based on prevailing energy performance certificates will receive more points while unsustainable real estate will receive fewer points or even a reduction in points.

WOZ cap in the WWS system

Currently, the WOZ (waardering onroerende zaken/value of real estate) value of a home is directly linked to the number of points in the WWS system. In May 2022, a new law was introduced to cap the share of the WOZ value in the WWS point total at a maximum of 33%. This legislation will move a portion of homes with high WOZ values from the liberalised sector to the regulated sector where the maximum reasonable rent is capped based on the number of WWS points. The legislation will have a significant impact on cities and regions with relatively high WOZ values, such as the Big Four. With the introduction of the new mid-priced rental sector and the announced proposed adjustments in the WWS point system, the threshold for the WOZ cap is expected to move to 187 points as of January 1, 2024.

Transfer tax

On January 1, 2023, the changes to the transfer tax on residential properties went into effect. The rate for real estate investors, both private and institutional, increased by 2.4%, from 8% to 10.4%. The increased transfer tax is likely to have a similar negative effect of 2.4% on the valuation of real estate.

Conclusions

  • Following Covid, the economy recovered in 2022 with a GDP growth of 4.2%. Due to the war in Ukraine, uncertainty increased. GDP growth is forecasted at around 0.4% for 2023.

  • Consumer confidence reached a historically low level in September (-59). In December, confidence level improved to -52.

  • The inflation rate reached 10.0% in 2022, up from 2.7% in 2021. This is largely caused by rising energy prices.

  • The ECB increased its base interest rates from -0.5% to 2.0% between July and December 2022, an increase of 250bp. Additional increases are expected in 2023.

  • Housing prices increased in the first half of 2022 and began decreasing in August. In December, the year-over-year growth rate was 2.7%, a relatively low number compared to previous years.

  • Despite the rising interest rates, the investment volume in residential real estate remained high. In 2022, investment volume was €7.7 billion, up from €7.4 billion in 2021. Investor activity began to decline in the summer. This is expected to lead to lower investment volumes in 2023.

  • The yield levels started to rise in 2022. As of Q2 2022, yield levels have increased by 30 to 40 bps. It is expected that yield levels will further increase during 2023.

  • The updated legislation for rent increases has gone into effect. Rental growth is now linked to wage growth instead of CPI. The rental growth is now wage growth + 1.0% in the liberalised sector and wage growth –0.55 in the social sector.

  • The mid-priced rental sector will be regulated. Homes with up to 187 WWS points will fall within the mid-priced rental sector. This new legislation is planned to take effect on new contracts starting January 1, 2024.

  • The transfer tax for real estate investors has been increased from 8.0% to 10.4%, which will likely lead to negative revaluations in Q1 2023.