The Dutch residential market

Demand for housing remains high but new supply is lagging

The current housing shortage is approximately 390,000 homes (Primos, 2023), which is 4.8% of the total housing stock. This shortage is expected to persist due to the growing number of households and a lack of residential building projects being completed.

The net addition of homes declined slightly in 2023 to 68,500, well below the government’s target of 100,000. The number of households grew by approximately 90,000. Due to rising construction costs, national legislation (inclusion legislation related to nitrogen emissions) and lower interest from buyers, the construction of approximately 7,500 homes was postponed according to a survey of Capital Value amongst real estate developers (Capital Value, 2023).

The number of new permits being issued is declining strongly. The number of permits in 2023 reached only 54,000, a decline of 10,000 compared to the same period in 2022. This will result in lower completions for the years to come and supply will not keep up with demand. At the end of 2023 the SBI (Start Bouw Impuls) has been appointed by the national government. This will be a financial impulse for in total 145 municipalities and 31,000 new houses, which have a construction start in 2023, 2024 and 2025. Despite this financial boost, it is expected that housing shortage will keep increasing in the years to come. According to Capital Value (2024), the number of completions will be around 55,000 in 2024 and 62,000 in 2025.  

Figure 9: Permits and net additions to the housing stock

^{Number of homes}

^{Source: CBS, 2024}

Turnaround in the owner-occupied housing market

The prices of owner-occupied houses decreased by a total of 6.2% between September 2022 and May 2023 (CBS, 2023). The stabilisation of mortgage interest rates and increase in wages have since caused prices go up again. Between May and December 2023, housing prices rose by 3.4%. Overall, housing prices in 2023 were down approximately -/-2.8% compared to 2022.

The upward trajectory of housing prices is expected to persist. The four biggest banks in the Netherlands (DNB, Rabobank, ING and ABN AMRO) predict prices to increase by approximately 3.0% in 2024 and 3.3% in 2025. For 2024, the ING adjusted their forecast positively to a range of 5% to 8% (February, 2024).

Figure 10: Price development owner-occupied houses

^{In percentage left axis/Price index right axis}

^{Source: CBS, 2023; Amvest assumption, 2024}

Lower investor demand and higher yields

Investor demand has declined sharply due to a rise in interest rates as well as changes in fiscal regime. Investors view residential real estate prices as high compared to the risk-free rates and consider the expected return insufficient given the perceived risks involved. As a result, the investment volume in 2023 was about 51% lower than in 2022, with investments in existing properties being especially affected.

Figure 11: Investment volume Dutch residential real estate

^{In Billions Euro}

^{Source: Capital Value, 2023}

The increased interest rates have also resulted in higher gross initial yields. Gross initial yields for Dutch residential real estate increased by 5 to 25 bps quarterly, for a total of 100bps between Q2 (3.80%) and Q4 2023 (4.65%). At a government bond rate (risk free rate) of approximately 2.75% in 2023 and a gross initial yield of 4.65%, the risk premium (spread between risk free rate and gross initial yield) is around 190 bps (MSCI, 2024; Oxford Economics, 2023).

Figure 12: Gross initial yields Dutch residential

^{In percentage}

^{Source: MSCI, 2023; Amvest valuations Q4 2023}

Government intervention in the housing market

New elections

The Dutch government fell on 7 July 2023 and new elections were held on 22 November 2023, with PVV, GroenLinks/PvdA, VVD and NSC emerging as the four largest parties. The exploration phase of the formation process indicated that the most likely center right wing coalition of PVV, VVD, NSC and BBB.

The housing market is high on the agenda of almost all parties. Most parties recognise the urgent need to build more affordable rental homes in the social and mid-priced segments, as well as affordable owner-occupied homes. The government wants to assert greater control over the housing market, ease the administrative burden and build more (affordable) homes.

Annual rent increase

In 2022, the Dutch government approved an adjustment to the indexation of rent levels. Under the new Affordable Rent Act (“Wet betaalbare huur”), the annual rent indexation in the liberalised segment will be based either on wage growth (“CAO-loonstijging”) or CPI, whichever is lower. In 2023, wage growth was 3.1%, while CPI was 4.5%.

Additionally, the annual rental growth will be differentiated across rental segments. The social segment will be increased by wage growth, the mid-rental segment by CPI/wage growth + 1.0% and the free rental segment also by CPI/wage growth + 1.0%.

Mid-priced segment

There is a new law in preparation by the Minister of Housing and Spatial Planning for the regulation of the mid-priced rental segment. The current rent point system (“Woningwaarderingsstelsel” or “WWS”) regulates rents in the social housing segment. The WWS system assigns points to different features of a dwelling, such as the size, quality and value. The total score determines the maximum allowable rent. The threshold for social housing is 135 WWS points

The Affordable Rent Act would extend the regulation of rents to the mid-rental segment, which is likely to include homes with up to 186 points. As of 1 July 2023, this is equivalent to a monthly rent of €1,123.13. The act is expected to be implemented on 1 July 2024 and will apply to all new contracts.

The Ministry of Housing and Spatial Planning is also negotiating the modernisation of the points system. The energy efficiency of dwellings, the presence and size of a private outdoor space, the availability of communal indoor and outdoor spaces, and the quality of the kitchen and bathrooms will positively impact the number of WWS points.

Transfer tax

On January 1 2023, the higher transfer tax rate for residential properties came into effect. The rate for private and institutional real estate investors increased by 2.4%, from 8.0% to 10.4%. The higher transfer tax imposes a comparable negative effect of 2.4% on real estate valuations.

Conclusions

• After 10 consecutive rate hikes, the ECB holds deposit interest rates steady at 4.0%. The 10-year government bond rates fell in the last quarter of 2023, from 3.3% in early October to 2.3% in late December.

• The inflation rate has been declining gradually, reaching 1.2% in December 2023. The overall inflation rate for 2023 reached 3.8%.

• The economy entered a mild recession in Q2 and Q3, which was followed by moderate positive growth in Q4. Economic growth in total for 2023 was only 0.1%.

• Housing prices decreased by 6.2% between September 2022 and May 2023. The stabilisation of mortgage interest rates and increase in wages have since caused prices go up again. Between May and December 2023, housing prices rose by 3.4%.

• Due to the high interest rates, investment volumes plummeted. The investment volume for residential in 2023 stood at around €3.6 billion, which is around 51% lower than in 2022. Gross initial yield levels shifted strongly in 2023. From their lowest point in Q2 2022, yields shifted up by 85 bps towards Q4 2023.

• The annual rent indexation will be based either on wage growth (“CAO-loonstijging”) or CPI, whichever is lower. In 2023, this meant that rent increases were based on the wage growth of 3.1% and in 2024 to CPI of 4.5%.

• The Affordable Rental Act will extend the regulation of rents and rent increases to the mid-rental segment and is expected to come into effect on 1 July 2024. The mid-rental segment is likely to include homes with up to 186 points and will be subject to a maximum allowable rent and lower annual rent increase. The WWS points system will be modernised to better reflect the sustainability of the home and new building features such as communal spaces.

• On January 1 2023, the transfer tax rate for real estate investors increased from 8.0% to 10.4%, which consequently had a negative effect of 2.4% on real estate valuations in Q1 2023.