Download Foundation for significant price increase eroding

Pricing on the Amsterdam housing market
Foundation for significant
price increase eroding
ING Economics Department / January 2017
Summary
Foundation under Amsterdam house price increase eroding
House prices have again been rising in the Netherlands since 2013.
The price increase in Amsterdam in particular has been significant.
Affordability has consequently declined there, rapidly and substantially.
Prices should increase more slowly in the capital over the coming years,
therefore. If they continue to rise at the same pace, however, the risk of
a price correction increases. In that case, the price increases would be
supported less by fundamental drivers and increasingly by volatile
drivers. Examples are the fluctuating flows of capital from parents and
investors and the high expectations for further price increases. This
changing nature of the demand increases the sensitivity to shocks.
Fundamental drivers point to weakening, volatile drivers increase risk of correction
What drivers have an effect on house prices in Amsterdam? Are these fundamental or volatile drivers? And to
what extent do they point to the levelling off of price increases or an increased risk of a price correction?
Fundamental
driver
Drivers that influence Amsterdam prices
Affordability
Mortgage costs continue to rise as proportion of
income
House prices could continue to rise for years to come
Foreign cities like London and Stockholm show that house prices can
show above-average increases for years without being followed by a
correction. House price decreases are often ‘set off’ by a trigger.
This could be economic setbacks, substantial interest rate increases or
stricter regulation. How this trigger then affects sentiment is extremely
important. If people no longer believe that prices will rise, this could
cause or exacerbate a price correction. The recent crisis is a good
example of this.
Borrowing capacity
Rising slower than house prices
Home-buyers end up in difficulty less quickly than in the past
New home-buyers in Amsterdam who plan to live in the property for
only a short period of time must realise that price increases can level
off. The same holds true for private investors who enter the market with
the goal of selling the property on within a few years. If a price
correction occurs, private individuals who have recently bought homes
do not immediately face difficulties. The maximum amount they can
borrow as a percentage of the property value (LTV - Loan To Value) is
decreasing annually (101% this year, falling to 100% next year).
First-time buyers on the housing market are also required to make
repayments on the principal from now on. Consequently, if a correction
occurs their home is much less likely to be financially ‘under water’
than during the previous crisis.
Influence of Airbnb
Effect increasingly factored into prices
ING Economics Department
Points to levelling
Increases risk of
off of price increases price correction
Supply and demographics
New construction cannot accommodate population
growth
Buying versus renting
Buying somewhat less appealing compared to
renting
Influence of parents
Young people buying more often with help of
parents’ assets
Influence of investors
Growing importance of ‘buy-to-let’
Sentiment
Strong ‘present bias’ on Amsterdam housing market
Volatile
driver
2
Pricing on the Amsterdam housing market / January 2017
Introduction and contents
Purpose of the publication
With this publication, the ING Economics Department seeks to answer
the question:
What drivers point to weakening price increases or increase the
risk of a price correction on the Amsterdam housing market?
Why Amsterdam?
House prices in Amsterdam have risen spectacularly over the past few
years. In the third quarter of 2016, buyers paid 376,000 euros on average
for a home, over 50,000 euros more than one year earlier. The average
home in Amsterdam currently sells for 50% more than the average
home elsewhere. This mark-up has never been so high, and it continues
to grow. In 2005, just a decade ago, a home in Amsterdam was the same
price as the average home in the Netherlands.
Contents
Summary
2
Drivers
Income and affordability
5
Borrowing capacity
11
Buying versus renting
13
Influence of investors
15
Square metre in Amsterdam almost twice as expensive
Since homes in Amsterdam are on average much smaller than elsewhere
in the Netherlands, the difference in the price per square metre is even
greater. A square metre of living space in Amsterdam costs almost 90%
more than elsewhere in the Netherlands.
Influence of parents
16
Influence of Airbnb
17
Supply and demographics
18
What factors determine the prices in Amsterdam?
In view of the strong rise in house prices and the growing difference
relative to the rest of the Netherlands, in this publication we look
specifically at the Amsterdam housing market. With reference to various
drivers for house prices, we assess whether these point to a levelling off
in price increases or increase the risk of a price correction. We provide
insight into how these indicators are developing compared to their
‘historically usual’ values and/or compared to previous periods in which
rapid increases in house prices were followed by a correction.
Sentiment
20
ING Economics Department
Conclusion
3
22
Pricing on the Amsterdam housing market / January 2017
Explanation: why Amsterdam?
Amsterdam house prices are rising much faster
than the average...
...a home in Amsterdam currently commands 50%
more than a home elsewhere in the Netherlands...
...per square metre, the difference is as much
as nearly 90%
140
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
House price (PBK, index 2010 = 100)
120
Difference between the average transaction price in
Amsterdam and the Netherlands (excluding Amsterdam)
Difference between average asking price per m2 in
Amsterdam and the Netherlands (excluding Amsterdam)
100
80
60
Amsterdam
Amsterdam
40
The Netherlands
Nederland
20
0
1996
2001
2006
Source: CBS
ING Economics Department
2011
2016
0%
1996
2001
2006
2011
2016
Source: CBS, processed by ING Economics Department
4
No data available
0%
1996
2001
2006
2011
2016
Source: Huizenzoeker, CBS, processed by ING Economics
Department
Pricing on the Amsterdam housing market / January 2017
Price of home versus income
Owner-occupied home costs 5.5 times
the buyer’s annual income on average
5.5 times the net annual income to buy a home
The price of the average owner-occupied home in the Netherlands
currently represents about 5.5 times the average Dutch household’s net
annual income. That is somewhat higher than the long-term average for
the past 35 years. In 2008, an average household had to pay almost
7 times its net annual income. At the time, that was the highest level
since 1980.
Dutch price-to-income ratio has decreased significantly
During the crisis, what is referred to as the price-to-income ratio fell
rapidly. While incomes did take a hit, the decrease in the house prices
had a much stronger effect. The ratio hit its low in 2013. Since that point,
house prices in the Netherlands have once again been rising faster than
income and the ratio is increasing to some extent.
Reduction in transfer tax
In 2011, the transfer tax on the purchase of an existing home was
reduced from 6% to 2% of the value of the home. This saved thousands
of euros on a purchase. If we include the transfer tax in the price-toincome ratio, it is presently even further removed from the level of 2008.
High ratios in Sweden and the United Kingdom
In other countries, like Sweden and the United Kingdom, the ratio is at a
much higher level than in the Netherlands, from a historical perspective.
In Sweden, this ratio is even 50% above the historical average in that
country. The interest rate is even lower there than in the eurozone. In the
US, homes are currently relatively inexpensive in relation to income.
Price-to-income ratio in the Netherlands still far from returned to highest point
Price of owner-occupied homes versus household income*
12
10
8
Price
to income NL
Price-to-income
ratio NL
6
Long-term
average
Lange
termijn
gemiddelde
4
Including transfer tax
Inclusief
overdrachtsbelasting
2
1981
1986
1991
1996
2001
2006
2011
2016
* The house price is based on the price index for existing owner-occupied homes with the average house
price in 2010 serving as the basis. The household income is the net available income per household.
Source: CBS, OECD, ING Economics Department
High price-to-income ratio in Sweden and the United Kingdom
Price-to-income ratio of various countries compared to their long-term average
(index: average for 1980-2016 = 100)
160
Sweden
Zweden
140
VK
UK
120
Nederland
The Netherlands
Eurozone
100
VS
US
80
60
40
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
Source: OECD
ING Economics Department
5
Pricing on the Amsterdam housing market / January 2017
Price of home versus income
Amsterdam: price of home versus income
back at 2008 level
Amsterdam price-to-income ratio rises quickly
The price-to-income ratio in Amsterdam is rising much faster than on
average in the Netherlands. A home in Amsterdam (including transfer tax)
now costs the average Dutch person eight times their net annual income,
almost as much as in 2008.
Whose income?
For the development of Amsterdam house prices, the income of potential
Amsterdam home-owners is in fact more relevant than the income of
Dutch residents on the whole. But there are no data on this available:
after all, we do not yet know who these people are. For an
approximation, we can look at the income of current Amsterdam homeowners. These data also support the same conclusion: in order to
purchase a home in Amsterdam, a buyer must pay virtually the same
number of annual incomes as in 2008.
Use of price-to-income ratio as indicator?
Comparing house prices to income is a commonly used means* of
investigating whether house prices are overvalued. The price-to-income
ratio is mainly used because of its simplicity. But a few things must be
pointed out when using this indicator. The most important being that
when purchasing a home, households not only look at their income, but
especially at the monthly expenses they must pay. These are
determined not only by the price of the house, but also by the interest
rate. Precisely in a situation where the interest rate is already very low,
monthly expenses are sensitive to a further decrease in the interest
rate.** That is why we do not consider this indicator to be usable.
In Amsterdam, the price-to-income ratio is back at a record level
Price of owner-occupied homes versus income*
10
Price-to-income
Price-to-income ratio
Amsterdam
Amsterdam
8
6
based
on incomes
o.b.v. inkomens
of
Amsterdam
home-owners
A´dammers
met
eigen
woning
4
Price-to-income
ratio NL
Price to income NL
2
0
1995
1998
2001
2004
2007
2010
2013
2016
* The house price is based on the price index for existing owner-occupied homes with the average house price in 2010 serving as the
basis. The reduced transfer tax is included in the price. The household income is the net available income per household.
Source: CBS, OECD, ING Economics Department
* See for instance: UBS Housing bubble index, OECD
** If the interest rate falls from 3% to 2%, for instance, this results in a 33%
savings in gross interest charges. A fall from 5% to 4% (likewise 1 percentage
point) represents a savings of just 20%.
Conclusion: development in price of home versus incomes
Not a usable indicator
ING Economics Department
6
Pricing on the Amsterdam housing market / January 2017
Affordability
Owner-occupied homes in the Netherlands
very affordable
Affordability of Dutch owner-occupied homes is at historical average
The height of the mortgage costs as a percentage of the income
determines how affordable the home is. Buyers historically spend about
15 to 30% of their net income on housing costs.* Over the past few years,
first-time buyers in the Netherlands have had to put about 22% of their
income towards housing costs immediately after the purchase. This is
around the historical average, therefore. Affordability has improved
slightly since 2008. The lower interest rate means that mainly the
interest charges have decreased. The total costs have decreased less
significantly, since buyers are now required to make repayments on the
principal. The improvement in affordability contributed to the recent
increase in the demand for owner-occupied homes - and by extension to
price increases.
Consequences of poor affordability
If affordability declines, this results in the long-term in lower demand and
downward pressure on prices. This downward pressure often translates
into a gradual levelling off of price increases, as took place in the 20002005 period. But poor affordability can also be followed by a substantial
price correction, as took place in 2009. This kind of sudden correction is
usually set off by a particular trigger, like an economic crisis.
* Source: CBS, DNB, calculations by ING Economics Department. A home with an average home value
served as the basis. The income is equal to the average income of Dutch households. Since 2013, first
-time buyers on the housing market have been required to make repayments fully on annuity basis.
Existing home-owners can finance part of their mortgage on an interest-only basis. This allows them
to have lower costs on the same home. Affordability for this group is developing more favourably
than for first-time buyers.
ING Economics Department
Affordability in the Netherlands has improved since 2008, especially for existing home-owners
Affordability (mortgage costs as a % of income, net, immediately after purchase)
Poor
affordability
40%
Mortgage on
annuity basis
Annuitaire
Hypotheek
30%
First-time
buyers
Starters
(benadering)
(estimate)
20%
Existing home-owners
Doorstromers
(benadering)
(estimate)
Only interest
charges
Alleen
rentelasten
(is equalaan
to 100%
(=gelijk
100% afl.vrij)
interest-only)
10%
Good
affordability
0%
1996
2001
2006
2011
2016
Affordability
Affordability is expressed as the total net mortgage costs as a percentage of the net income in the
first month after purchase of a home with an average home value. Since 2012, home buyers have
been required to have
a mortgage in which repayments are made on the full principal (first-time buyers) or at least on part
of the principal (existing home owners). A large share of the mortgage costs actually consists of
asset accrual therefore. This situation is fundamentally different from the situation that existed in
the years prior to the credit crisis.
At that time, interest-only mortgages were in vogue and hardly any repayment was taking place.
Others opt to only include the interest payments and not the repayments on the principal when
calculating affordability. The ING Economics Department also includes repayments on the principal,
however, since the total costs - not just the interest charges - determine whether the monthly
mortgage obligations are ‘affordable’ for a household.
7
Pricing on the Amsterdam housing market / January 2017
Affordability
Affordability in Amsterdam deteriorating
Affordability in Amsterdam is deteriorating, particularly
for first-time buyers
The affordability of homes in Amsterdam is rapidly declining at the
moment. Because of the rapid price increases, a first-time buyer* in
Amsterdam puts almost 35% of his/her household income towards costs.
That is more than at the turn of the century and more than in 2008. The
reason why affordability for first-time buyers is worse now than in 2008,
despite the lower interest rate, is because first-time buyers now have to
make repayments on the principal. The situation has deteriorated
significantly less for existing home-owners who want to purchase a
home in Amsterdam. They are permitted to finance a large portion of the
value of the home on an interest-only basis**. They profit more from the
low interest rate than first-time buyers and their affordability is still
significantly better than in 2008. But affordability is now also declining
for existing home-owners.
In the past: poor affordability followed by price correction
House prices in Amsterdam are more volatile than on average, which
also causes stronger fluctuations in affordability. Over the past 20 years,
there have been two previous periods in Amsterdam during which
affordability deteriorated significantly, specifically 1999–2001 and 2007–
2009. Both periods were characterised by strongly increasing house
prices subsequently followed by periods with declines in prices. On both
occasions, it was crises (the dot-com crisis and the credit crisis,
respectively), with the accompanying loss in confidence, which triggered
the turnaround in the capital.
Gradual weakening or sudden correction?
Since affordability is declining, it is likely that the strong house price increases
in the capital will weaken over the coming years. But if these substantial
increases nonetheless continue, the risk of a sudden price correction grows.
A new period of economic setbacks, a strong rise in the interest rate (see
pages 9-10) or another trigger could elicit such a correction.
*First-time buyer whose income is equal to that of an average household in the Netherlands.
** Assumption: existing home-owners finance an average of 50% on an interest-only basis.
ING Economics Department
Affordability of a home in Amsterdam is rapidly declining, particularly for first-time buyers
Affordability (mortgage costs as a % of income, net, immediately after purchase)
Poor
affordability
40%
Annuitaire
Hypotheek
Mortgage on
annuity basis
30%
First-time
buyers (estimate)
Starters
(benadering)
Existing home-owners
(estimate)
Doorstromers
(benadering)
20%
Only interest
charges
Alleen
rentelasten
(=gelijk
vrij)
(is equalaan
to 100% afl.
interest-only)
10%
Good
affordability
0%
1996
2001
2006
2011
2016
When does poor affordability result in fewer price increases?
What is relevant for the current situation is whether the turnarounds in 2001 and 2009 would still
have taken place even if the crises mentioned had not occurred. Would house prices simply have
continued to rise in that case? In other words, how far could affordability have deteriorated until a
correction would have followed? Quite far, in fact, as foreign cities such as London and Stockholm
demonstrate. After all, there has been talk of overvaluation in those cities for years. And yet prices
there continue to increase strongly. We do not rule out that this could happen in Amsterdam as well.
Conclusion: current development in affordability...
points to weakening:
8
increases risk of correction:
Pricing on the Amsterdam housing market / January 2017
Affordability
What if the interest rate rises? Two scenarios
Rising interest rate is accompanied by rising growth in income
The ING Economics Department expects that the interest rate will
increase slightly if the economic recovery continues. This will put a
downward pressure on the affordability of homes. But a rising interest
rate is normally ‘supposed to be’ accompanied by growth in income: the
two are usually the effect of positive economic developments. This
accompanying growth in income drives affordability upwards. Alongside
this, mortgage interest relief is yet another extra cushioning factor when
interest rates rise: a higher interest rate allows home-buyers to deduct a
larger portion of their gross costs. The net costs are relatively lower in
that situation.
Scenarios provide insight
The stronger the increase in the interest rate, the greater the impact on
affordability. We elaborate two scenarios here for the coming three
years: the ‘Basic’ scenario, in which the interest rate gradually increases,
and the ‘Extreme’ scenario, in which the interest rate shows a sudden
strong increase. In our view, the ‘Basic’ scenario is the most plausible.
Still, it is also good to provide insight into what happens to affordability
and the maximum borrowing capacity if the interest rate unexpectedly
rises steeply.
ING Economics Department
‘Basic’ scenario
As the result of economic recovery and gradual normalisation of the monetary policy, the interest
rate (mortgage interest, 10-year fixed) rises by 0.25% per year from now on. The rise in the interest
rate remains constrained by limited worldwide growth and investment demand, the ageing of the
population and increased competition on the mortgage market. Income growth is 2% per year.
‘Extreme’ scenario
Sudden politico-economic events prompt uncertainty and shortages on capital markets, giving rise
to lack of funding. Mortgage lenders are less willing to lend money and demand a higher interest
rate. This is exacerbated by increased regulatory requirements (higher buffers). As a result, the
mortgage interest rate rises by 1% per year, which has not happened in more than 25 years
(1989–1992 period). Income growth is 2% per year, lagging behind what one would expect with
these kinds of interest rate increases because this is an extreme shock scenario.
9
Pricing on the Amsterdam housing market / January 2017
Affordability
If the interest rate rises, affordability deteriorates.
‘Basic’ scenario
‘Extreme’ scenario
 Interest rate: +0.25%
 Income: + 2% per year
 Interest rate: +1%
 Income: + 2% per year
 Assumption in order to determine affordability:
house prices rise by 4% between 2016 and 2019
Affordability gradually declines further
Assumption: house prices continue to rise by 1% per quarter
 Assumption in order to determine affordability:
house prices remain the same between 2016
and 2019
Extremely strong decline in affordability
Assumption: house prices remain the same
40%
Mortgage
Annuitaireon
Hypotheek
annuity
basis
30%
40%
Starters buyers
First-time
(benadering)
(estimate)
Mortgage on
Annuitaire
Hypotheek
annuity basis
30%
20%
Existing
homeDoorstromers
(benadering)
owners
(estimate)
First-time
buyers
Starters
(benadering)
(estimate)
20%
10%
100% Aflossingsvrije
interest-only
100%
mortgage
hypotheek
100% interest-only
Aflossingsvrije
100%
hypotheek
mortgage
10%
Existing homeDoorstromers
owners (estimate)
(benadering)
0%
1996
2001
2006
2011
0%
1996
2016
Affordability declines, also in the event of limited price increase
The rising interest rate causes affordability to deteriorate in the basic scenario. Even if
house price increases in Amsterdam fall from more than 10% to 4% on annual basis
from now on, the housing costs of both first-time buyers and existing home-owners will
gradually increase. In that case, affordability for first-time buyers will decrease in three
years to net housing costs of almost 40% of their net incomes. Existing home-owners
will also pay ever higher housing costs. By 2019, affordability for existing home-owners
will again be as poor as in 2008. This deteriorating affordability will put downward
pressure on prices.
2001
2006
2011
2016
Affordability declines, even if prices stabilise
The rapidly rising interest rate causes affordability to deteriorate substantially in the
extreme scenario. Even if house prices in Amsterdam no longer rise in this scenario from
now on, housing costs will increase rapidly. By 2019, affordability for both first-time
buyers and existing home-owners will be worse than in 2008. The difference between the
mortgage on annuity basis and mortgage on interest-only basis declines because a larger
share of the total costs of a mortgage on annuity basis consists of interest charges.
The deteriorating affordability will put downward pressure on prices.
The risk of decreases in prices will grow significantly.
Conclusion: development of affordability in ‘Basic’ scenario
Conclusion: development of affordability in ‘Extreme’ scenario
points to weakening:
points to weakening:
ING Economics Department
increases risk of correction:
10
increases risk of correction:
Pricing on the Amsterdam housing market / January 2017
Borrowing capacity
Standards become stricter, borrowing capacity
remains on level
Actual borrowing capacity has not been reduced
While credit conditions have become stricter, the actual maximum amount that homebuyers can borrow has decreased much less. This amount has even started to increase
again as of this year. The average main breadwinner can again borrow more than
220,000 euros on his/her own, which is more than in 2008 (see figure below). There are
various reasons for this:
Credit conditions strongly curtailed
Generous credit lending was an important reason for the strong house price increases in
the period prior to the outbreak of the credit crisis. Financing standards were substantially
tightened during the credit crisis. With the interest rate remaining the same, households
can pay a smaller amount of their income towards housing costs (see figure below).
Particularly households with a relatively low income can borrow substantially less now
than in the past.
1. The mortgage interest rate has decreased substantially since 2008. As a result,
home-buyers can borrow a significantly higher mortgage amount for the same
monthly costs. Although home-buyers can deduct less for tax purposes (after all, the
interest rate is lower), this does not outweigh the advantage of the falling interest
rate.
2. Incomes do not remain constant. The average income continued to increase during
the crisis years. This income growth has been stronger since 2015 because the
economy is growing and unemployment is falling.
3. 2016 marked the first time in a long time that the Nibud standards were not further
tightened. With rising incomes and falling interest rates, the maximum mortgage
amount that home-buyers could borrow this year was higher than last year. The
standards will once again be expanded somewhat in 2017.
Less borrowing capacity - with same interest rate and income
Maximum mortgage for single-income household at interest rate of 5% (per income group)
€€350,000
350.000
€€300,000
300.000
€€250,000
250.000
60,000
60.000
€€200,000
200.000
50,000
50.000
€€150,000
150.000
40,000
40.000
€€100,000
100.000
30,000
30.000
€€50,000
50.000
Single-income household is allowed to borrow more than in 2008
The maximum mortgage for a main breadwinner earning the average income*
20,000
20.000
€€00
2008
2011
2014
2017
230.000
230,000
Source: Nibud (National Institute for Family Finance Information),
processed by ING Economics Department
220.000
220,000
210,000
210.000
200,000
200.000
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
*Based on a 10-year fixed interest rate period and average personal income of main breadwinner = 44,000 (2008) 48,000 (2016), assumption that interest rate increases by 0.25% in 2017.
Source: NIBUD, processed by ING Economics Department
ING Economics Department
11
Pricing on the Amsterdam housing market / January 2017
Borrowing capacity
Only if the interest rate rises considerably does
borrowing capacity decrease.
Impact of rising interest rate on borrowing capacity
If the mortgage interest rate rises, this affects not only the affordability of homes, but also the maximum borrowing capacity of buyers. We use the scenarios mentioned above (see page
9) to gain insight into how borrowing capacity will change in the next three years if the interest rate rises. We assume here that the NIBUD mortgage payments limits for 2017 will remain
in effect for 2018 and 2019 as well.*
‘Basic’ scenario
‘Extreme’ scenario
Interest rate: +0.25% per year, income: +2% per year
Interest rate: +1% per year, income: +2% per year
Development in borrowing capacity of main breadwinner until 2019:
Development in borrowing capacity of main breadwinner until 2019:
+1% per year
-4% per year
Because the income increase will compensate for the rising interest rate, the average
borrowing capacity of main breadwinners will grow slightly. This slight increase in borrowing capacity has a weakening effect on house price increases. After all, house prices are currently rising by 4 to 5% per year, while borrowing capacity will only increase
by 1% on an annual basis.
The interest rate rise is so strong that the rise in income cannot compensate for it.
Borrowing capacity declines as a result. Consequently, home-buyers will be able to
borrow thousands of euros less each year than in the previous year. Weakening
house prices are inevitable. The risk of a price correction grows significantly.
Borrowing capacity developing more favourably for double-income households
The development in the borrowing capacity as shown above is based on the average breadwinner income. In Amsterdam, however, many home-buyers take out a mortgage based on two incomes.
Double-income households are currently profiting from increasingly more generous credit standards. In 2015, still only 33% of the second income counted towards the determination of the
mortgage payments limit. This year, this percentage was 53% and from next year onwards, the percentage will rise annually by 6.6 percentage points (from 60% in 2017 to 100% in 2023). The
result of this is that double-income households will be able to borrow thousands of euros more each year than in the past. For them, the development in borrowing capacity will therefore turn out to
be somewhat more favourable in both scenarios.
Conclusion: development of borrowing capacity in ‘Basic’ scenario
Conclusion: development of borrowing capacity in ‘Extreme’ scenario
points to weakening:
points to weakening:
increases risk of correction:
increases risk of correction:
*The borrowing standards for 2017 were adopted at the end of October by the Ministry of Home Affairs on the advice of
NIBUD. These were expanded slightly with respect to 2016. New changes may follow in the years to come.
ING Economics Department
12
Pricing on the Amsterdam housing market / January 2017
Conclusion: see next page
Buying versus renting
Buying more attractive compared to renting
Buying increasingly less expensive than renting
Over the past several years, buying a house in the Netherlands has
become increasingly less expensive compared to renting. The asking price
for an owner-occupied home is now equal to 20 times the basic annual
rent for a comparable rental home in the deregulated sector*. In 2010,
that figure was still 24 times the annual rent. This represents a decrease
of almost 20%. This price-to-rent ratio fell because house prices were
declining significantly until 2013, while rents in the deregulated sector
remained virtually constant. From 2013 onwards, owner-occupied homes
became more expensive, but rents also increased. As a result, the price-to
-rent ratio has remained virtually unchanged since then.
Monthly costs-to-rent ratio gives a better picture
Like the price-to-income ratio, the price-to-rent ratio does not take any
account of changes in the interest rate or regulations. We therefore
construe a monthly costs-to-rent index**, which compares the monthly
costs of buying to the monthly costs of renting. This shows more clearly
that buying in the Netherlands has become significantly more attractive
than renting since 2013.
Attractiveness of renting affects house prices
Since renting is becoming increasingly more expensive compared to
buying, some demand will shift from renting to buying. Not only private
individuals will be more inclined to buy, investors will also be more enticed
to buy housing with the aim of letting it out (see page 15). Both
developments serve to drive house prices in the Netherlands up.
* The lion’s share of rental housing in the Netherlands is in the subsidised rental sector. This
housing is not accessible for people with middle or high incomes. There are also waiting lists in
many regions. As such, the subsidised rental sector is not a real alternative for people
considering buying. For this reason, we compare purchase prices with rents in the deregulated
sector here.
** Calculated based on the average net mortgage costs of first-time buyers immediately after
purchase. The consideration of whether to buy or rent is the most relevant for them. Extra
housing costs (maintenance, property tax, etc) have not been included in the analysis.
Buying less expensive than renting
Price-to-rent and Monthly costs-to-rent indices, (2010 = 100)
110
105
Higher costs from 2013 onwards because
of mandatory repayment on principal
100
95
90
Monthly
costs-to-rent
Maandlasten-to-rent
85
Price-to-rent
Price-to-rent
80
75
70
2010 2011 2012 2013 2014 2015 2016
Source: Pararius, CBS, processed by ING Economics Department
Rents in the Netherlands have only recently risen
Basic rent in the deregulated sector, per m2
€10
€9
€8
€7
€6
€5
2010
2011
2012
2013
2014
2015
2016
Source: Pararius, processed by ING Economics Department
ING Economics Department
13
Pricing on the Amsterdam housing market / January 2017
Buying versus renting
Renting in Amsterdam once again somewhat more
attractive than buying
Rents in Amsterdam were rising strongly until recently
Although owner-occupied homes were less popular in Amsterdam
between 2010 and 2013, the demand for rental housing in the
deregulated sector remained as high as ever. This caused Amsterdam
rents to continue to increase during this period, while average rents
elsewhere in the Netherlands virtually stabilised. Rents in Amsterdam are
substantially higher than the national level. There is great demand for
deregulated sector rental housing in Amsterdam, while this kind of
housing represents a small percentage of the capital’s housing stock,
which is largely made up of subsidised rental housing.
Until recently: buying in Amsterdam was more attractive
than renting...
The combination of rising rents and falling house prices caused the price-torent and monthly costs-to-rent ratios to decrease by almost a quarter in
Amsterdam between 2010 and 2013. Over a short period of time, therefore,
buying in Amsterdam became significantly more attractive than renting.
From 2013 until the end of 2015, owner-occupied homes in Amsterdam
again became more expensive, but rents also increased. This caused the
price-to-rent ratio to remain constant. The falling interest rate caused the
monthly costs-to-rent ratio to decrease further: buying continued to become
more attractive, even during these years.
...but renting is now gaining ground
The ratios are once again rising in the capital this year. This is due to the
strong rise in house prices, at a time when rents are momentarily not
increasing and the interest rate is no longer falling. It is too early to talk about
a real turnaround. The demand for rental housing in the deregulated sector
is great, particularly among expats, flexible workers and people with a middle
income, while the supply remains limited. The ratios are still well below the
pre-crisis level. This indicator therefore currently points to declining price
increases only to a limited extent. It does not in any event point to a
heightened risk of a price correction in the capital.
Rents in Amsterdam were rising rapidly until recently
Basic rent in the deregulated sector, per m2
€ 15
2
Huurprijs
per
m2 Adam
Rent per m
Amsterdam
€ 10
2
Rent per m
Huurprijs
perNetherlands
m2 Nederland
€5
2010
2011
2012
2014
2015
2016
Since the end of 2015, renting is once again more attractive than buying
Price-to-rent and Monthly costs-to-rent indices, (2010 = 100)
Purchase price per m2 / basic rent in the deregulated sector per m2
Higher costs from 2013 onwards because
of mandatory repayment on principal
110
100
Monthly costs-to-rent
Maandlasten-to-rent
90
Price-to-rent
Price-to-rent
80
70
2010
2011
2012
2013
2014
2015
2016
Source: Pararius, Huizenzoeker, CBS, processed by ING Economics Department
Conclusion: current development in buying versus renting...
points to weakening:
ING Economics Department
2013
Source: Pararius, processed by ING Economics Department
14
increases risk of correction:
Pricing on the Amsterdam housing market / January 2017
Influence of investors
The influence of investors is growing
Capital: role of investors on the Amsterdam housing market
As it stands now, high rents compared to purchase prices ensure a good initial
yield for investors. The low interest rate and moderate return potential of other
investment opportunities drive up extra demand for Amsterdam housing as
investment properties. After all, with a low interest rate, the net discounted
value of future rental income is higher than with a high interest rate*. In
addition to permanent letting, holiday rentals can also be interesting for
private investors. Older people sometimes buy an apartment in advance and
let it out for number of years before moving into it themselves.
Buy-to-let extremely attractive
Data from the Land Registry Office indicate that buy-to-let purchases
represent a growing share of the total property purchases in Amsterdam, even
more than in 2008. The strong demand from private investors drives prices up.
This effect will not diminish in the years to come, given the limited share of
deregulated sector rental homes as a total of the housing stock and the still
low price-to-rent ratio (= high initial yield) in the capital. This indicator does not,
therefore, point to a weakening in price increases. Only in the long term will the
upward pressure of buy-to-let presumably diminish somewhat on the
Amsterdam housing market. A relatively large number of deregulated sector
rental properties are being built in the capital. If the municipality continues this
policy in the coming years, the rental housing stock will increase. This could put
pressure on rents, thus making investments in residential property less
attractive.
More sensitive to shocks
The more the housing market is influenced by investors, the more sensitive it is
to shocks. The nature of the demand becomes more volatile: investors are
driven by return and if they expect higher returns in other markets (for
instance, if the interest rate rises), the demand for residential property will
decline. In this way, the role of investors increases the risk of a price correction.
* Discounted at the interest rate for savings on immediately available funds in effect at that moment.
Return on ‘buy-to-let’ in Amsterdam much more attractive than in 2008
Average annual return, first 10 years, based on net discounted value*
6%
4%
2%
0%
2008
2010
2014
2016
Influence of small investors on the Amsterdam housing market greater than before the crisis
Buy-to-let transactions**, share in total number of transactions, estimated
15%
10%
5%
11%
11%
10%
2006
2007
2008
8%
8%
9%
9%
11%
10%
2009
2010
2011
2012
2013
2014
13%
16%
0%
2015
2016 Q1
** Estimate 'Buy-to-let transactions’: buyers with 2-9 residential properties, where the bought property is not the principal residence and not a holiday home
Source: Land Registry Office, processed by ING Economics Department
Conclusion: current development in the influence of investors...
points to weakening:
ING Economics Department
2012
Source: Pararius, CBS, DNB, processed by ING Economics Department
15
increases risk of correction:
Pricing on the Amsterdam housing market / January 2017
Influence of parents
Greater role played by parents’ assets
Savings from wealthy parents are pouring into the Amsterdam housing market
Gifts and loans to children for the purchase of a home are becoming
increasingly popular. More children are being helped by their parents to buy
a house than in the past, as evidenced by the ING Financial Fitness Barometer.
Anyone who can offer more will do so. Especially in Amsterdam, the wealth of
buyers’ parents has an effect on rising house prices: the capital mainly
attracts young people and young adults. In today’s market, many of them do
not have the financial latitude themselves to buy. Parents jump in and are
doing that more often than in the past. There are various reasons for this:
1. With low interest rates on savings and moderate yields from shares and
bonds, lending to children or investing in a property is an attractive option
from a financial perspective.
Number of searches for ‘gift to child’
Number of searches for ‘family mortgage’
120
30
100
25
80
20
60
15
40
10
20
5
0
2010
2012
2014
0
2010
2016
Source: google trends
2012
Young people are receiving support more often than in the past
When I first became a home-owner...
3. The tax exemption for gifts is more generous than in the past. From 2017
onwards, moreover, the expanded gift exemption will become permanent.
15%
The role of parental wealth will continue in the years to come
Wealthy parents will continue to have an impact on the Amsterdam housing
market in the years to come. The interest rate will rise eventually, but the
other three factors will remain. This indicator does not currently point to a
weakening in prices, therefore. The risk of a price correction does grow to
some extent, however. If parents start to wonder how sustainable the
Amsterdam house price increases actually are, this could put a sudden stop
to the flow of wealth.
ING Economics Department
2016
Source: google trends
2. Older people are much wealthier than in the past. They have often largely
paid off their mortgage and are receiving higher and higher inheritances
from their parents. As such, it is easier for them to give up some of this
wealth. Added to this is the fact that they have fewer children to divide
this among.
4. It is increasingly difficult for young people to finance the purchase of a
home. They are required to contribute a great deal of their own money,
while they themselves often have little in the way of savings. They are
also more likely to have a flexible employment contract than older
generations.
2014
20%
2%
My parent(s)
bought the
home
Hebben
mijn ouder(s)
de woning
gekocht
6%
10%
1%
10%
5%
0%
35 min
0%
3%
6%
4%
3%
35-55
55+
My parent(s)
lent me amij
large
Hebben
mijn ouder(s)
een
sum ofgeldbedrag
money geleend
groot
My parent(s)
gifted me
a large
Hebben
mijn ouder(s)
mij
een
sum ofgeldbedrag
money geschonken
groot
Source: ING Financial Fitness Barometer
Conclusion: current development in the influence of parents...
points to weakening:
16
increases risk of correction:
Pricing on the Amsterdam housing market / January 2017
Influence of Airbnb
Airbnb’s driving up of prices certain to decline
Airbnb drives prices up
Airbnb has taken off in the capital. More than 11,000 entire homes and another 2,500 rooms
are offered to travellers via the website. One in six home-owners in popular tourist areas of
Amsterdam now offer overnight stays via Airbnb. The strong rise of Airbnb and other letting
sites has suddenly made a home more than just somewhere to live: it has become an earning
model. This has driven up prices.
Airbnb supply in Amsterdam
Amsterdam aims for better enforcement
If it were up to the municipality of Amsterdam, the strong growth in holiday lets in the
capital would be curbed. The municipality is aiming mainly to crack down on parties
letting accommodation for more than 60 days in a year (illegal hotels). New agreements
were recently made with Airbnb. From 1 January, Amsterdam Airbnb hosts will have a
day counter visible on the website. As soon as they have reached 60 days, they will not be
able to accept new bookings.
Supply is changing but demand remains
Amsterdam is very attractive for tourists. The demand for holiday lets is not expected to
decrease over the coming years. In view of the municipality’s efforts, we expect that the
supply from illegal hotels will indeed decline somewhat. If compliance improves, operating
an illegal hotel will become less attractive and the demand from mala fide investors for
housing will decrease: this will push house prices down. On the other hand, Airbnb rates
may in fact increase somewhat because of the falling supply of illegal hotels (after all,
demand will remain on level). This will make the earning capacity of an owner-occupied
home higher for private individuals. This drives house prices up and can in turn entice new
supply from private owners.
Driving up of prices will certainly decrease
It is difficult to predict how the effects outlined above will work out on balance. As we
stated earlier, it is difficult to determine precisely how great Airbnb’s effect will be. What is
clear: the longer Airbnb exists, the greater the share of this effect that will be factored into
house prices. The driving up of prices will almost certainly level off in the coming years,
therefore.
Source:
www.insideairbnb.com
Conclusion: current development in the influence of Airbnb...
points to weakening:
ING Economics Department
17
increases risk of correction:
Pricing on the Amsterdam housing market / January 2017
Indication that bubble may be forming?
Indication that bubble may be forming?
Conclusion: see next
NOpage
Neutral
Supply and demographics
Amsterdam’s population is growing...
Foreign influx is driving population growth
Immigration has caused significant population growth in Amsterdam over the past
two years. Approximately half of this influx comes from the US, Europe, India and
China. These people are often in a good situation financially and are therefore more
likely to opt for an owner-occupied home or deregulated sector rental. The foreign
influx was much more limited in the crisis years 2008-2013. At that time, the
population of the capital grew more as a result of domestic moves, as well as births.
Many young people moved to Amsterdam, but few families left the capital (instead
opting to stay because their homes were ‘under water’, for instance). The outflow of
families has since resumed, so that for the first time since 2007, more people left
Amsterdam last year than moved to it from elsewhere in the Netherlands.
Migration will determine whether strong population growth will persist
Whether the strong population growth in Amsterdam will continue in the years to
come is therefore related to the question of whether the foreign influx will remain
on level. The outlook is favourable. The Amsterdam services sector is growing
rapidly and there is great demand for qualified personnel. The foreign influx is
incidentally not the only driver of population growth in the capital. The stable and
high birth surplus in Amsterdam will also form an important foundation for this
growth in the coming years.
Migration is fickle
But migration is fickler than domestic moves. Amsterdam's appeal depends on
the economic tide and immigration legislation. In 2005 and 2006, more people
moved from Amsterdam to other countries than vice versa. If this kind of decline
were to happen in the future again, this does not automatically translate into a
strong corresponding decrease in the growth in the number of households. During
the crisis, the number of persons per household in the capital increased. This was
due in part to the fact that many Amsterdam residents were more or less forced
to live together, while they would have preferred to have their own home. This
group can provide some compensation if demand from migrants disappears.
These are mainly first-time buyers, however. It is precisely this group for which
affordability is an important issue.
ING Economics Department
Amsterdam population growth depends strongly on foreign migration
Number of people
15,000
15.000
10,000
10.000
5.000
5,000
00
-5.000
-5,000
-10.000
-10,000
1990
1995
2000
2005
2010
birth surplus
geboorteoverschot
domestic migration
binnenlandse
migratie
foreign migration
buitenlandse
migratie
population growth
bevolkingsgroei
2015
Source: OIS Amsterdam (1990-2002) and CBS (2003-2015)
18
Pricing on the Amsterdam housing market / January 2017
Points to weakening:
Risk of correction:
Supply and demographics
...and major new construction efforts
are not enough
Municipality of Amsterdam steps up construction
Construction was started on more than 8,000 homes in Amsterdam last
year, the highest number ever. The crisis caused new construction
projects in Amsterdam to lie dormant for quite some time in fact. Fewer
than 3,000 homes per year were built in the capital between 2009 and
2013, while the population grew by some 10,000 people per year. The
municipality’s ambition is to build 50,000 new homes by 2025. The total
housing stock in Amsterdam (including transformations and demolition)
will likewise increase by 50,000 homes between 2015 and 2025,
ABF Research expects.
Primos forecast: supply will lag behind growth in number
of households until 2020
Despite this strong growth in supply, the housing stock will, mainly in the
coming years, lag behind the expected growth in the number of
households. ABF expects more than 30,000 extra households between
2015 and 2020 alone. This forecast is based on a population increase in
Amsterdam of about 12,000 people per year (until 2020), in line with the
past several years. As indicated on the previous page, this forecast
depends on the assumption that the immigration from abroad to
Amsterdam will continue in the coming years.
Pressure will decrease from 2020 onwards
The growth in the housing stock is expected to be more in balance with
growth in the number of households from 2020 onwards. The pressure on
the Amsterdam rental and purchase markets will stabilise from that point on.
But in the coming years in particular, it will be impossible for construction to
keep up with the capital’s appeal. In the near future, the lagging supply will
put upward pressure on house prices. This indicator does not currently point
to a decrease in price pressure, therefore. There is a slightly increased risk of
price corrections, however, since the demand from people coming to
Amsterdam from abroad is by definition more fickle.
Record number of new homes in 2015
Residential construction production in Amsterdam, per year of start of construction
9,000
9.000
8,000
8.000
7,000
7.000
6,000
6.000
5,000
5.000
4,000
4.000
3.000
3,000
2.000
2,000
1.000
1,000
--
Buy
Koop
Market rent
Markthuur
Subsidised
rent
Sociale
huur
1994
1997
Source: Municipality of Amsterdam
2003
2006
2009
2012
2015
Growth in housing stock will lag behind growth in number of households
Forecast for growth in housing stock, number of households and population every 5 years
80,000
80.000
60,000
60.000
40,000
40.000
20,000
20.000
00
2015-2020
Growth
in stock
Groei voorraad
Source: ABF Primos forecast
2020-2025
2025-2030
Growth
in number
Groei
huishoudens
of households
Growth
in
Groei bevolking
population
Conclusion: current development in supply and demographics...
points to weakening:
ING Economics Department
2000
19
increases risk of correction:
Pricing on the Amsterdam housing market / January 2017
Sentiment
Sentiment extremely important for pricing
Sentiment is an important factor
‘Hard’ factors like income development, affordability or demographics
often prove ultimately insufficient in explaining increases in house prices.
Sentiment and expectations among home-buyers play an extremely
important and often crucial role, as demonstrated by, for instance,
research by Schiller (2007).
VEH market indicator at extremely high level
Association of (Prospective) Home-owners (VEH) Market Indicator, index
140
120
100
80
Dutch residents very positive about housing market
Sentiment on the housing market is very positive, according to the Own
Home Market Indicator (Eigen Huis Marktindicator). This indicator is
fluctuating around 120, much higher than in 2008. The Own Home
Market Indicator is based on what Dutch residents think of the general
situation for buying a home, the development in purchase prices and the
development in the mortgage interest rate (both looking back and
looking ahead). The Dutch are very positive about all these aspects at the
moment. The ING Woonbericht also indicates that sentiment is
extremely high.
60
40
20
0
2005
2008
ING Economics Department
2014
2017
Source: Association of (Prospective) Home-owners (VEH)
Majority does not expect price decrease in next 10 years
Will the prices of Dutch owner-occupied homes fall again?
Majority expects price increases for another 10 years at least
The majority of Dutch residents (55%) expects that house prices in the
Netherlands will continue to rise for at least another 10 years, according
to the ING Financial Fitness Barometer. 1 in 20 even expect that house
prices will never again decline.
Sentiment can reinforce and prolong developments
Behavioural economic research demonstrates that current developments
strongly influence our expectations for the future (what is referred to as
‘present bias’). Our expectations for developments in house prices in the
future are also affected by developments in the past. This phenomenon
reinforces and prolongs increases in house prices, but decreases in these
prices as well.
2011
50%
31%
14%
5%
Yes,
within 33years
Ja, binnen
jaar
Yes,
in 3 to
10 10
years
Ja over
3 tot
jaar
No, not
Nee,
nietin
inthe
de
next 10 years
eerstkomende
10 jaar
No, prijzen
prices will
never
Nee,
zullen
nooit
fall again
meer
dalen
Source: ING Financial Fitness Barometer
20
Pricing on the Amsterdam housing market / January 2017
Sentiment
‘Present bias’ on Amsterdam housing market
Sentiment on the housing market extremely positive
People are still more positive about the development in the Amsterdam
house prices than about the Netherlands as a whole. More than 70% of
the Dutch expect no decline in prices in the capital in the next 10 years.
1 in 7 Dutch residents even expect that house prices in the capital will
never again decline. The fact that there have already been two periods
since the turn of the century during which Amsterdam house prices did
indeed fall does not seem to affect these optimists.
Overvalued, but still no declines in prices expected
At the same time, the Dutch believe that homes in Amsterdam are
overvalued.
No less than 94% think that homes in the capital currently cost more
than they are actually worth. Just 54% believe this is the case for the
Netherlands as a whole. It seems contradictory that the Dutch think on
the one hand that Amsterdam homes are overvalued but are so
convinced, on the other, that prices will continue to rise. Because if these
house prices are indeed inflated, would it not make sense that this
bubble could burst in the coming years?
Sentiment can turn
The present bias (see the previous page) plays a role here. The danger of
sentiment is that it can turn quickly. In 2013, homes in Amsterdam were
very affordable, from a historical perspective, and buyers were spoiled for
choice as far as fine homes were concerned, but many of them held back
because they expected prices to fall even further. In 2007 and 2008, on
the other hand, many* expected that house prices would ‘simply’
continue to rise. Present bias played an important role in both situations.
The high expectations do not point to a weakening in the growth in
prices. They do increase the risk of a price correction in the capital.
* See for instance: http://financieel.infonu.nl/hypotheek/18127-dalen-de-huizenprijzen.html en
http://sargasso.nl/heeft-nederland-ook-een-huizenprobleem/
More positive about Amsterdam than about the Netherlands
Will the prices of Dutch/Amsterdam owner-occupied homes fall again?
50%
NL
31%
21%
14%
9%
14%
5%
Yes,
Ja,within
binnen3 3years
jaar
Yes,
in 33totot
1010
years
Ja over
jaar
No, not
Nee,
nietininthe
de
next 10 years
eerstkomende
10 jaar
Amsterdam
Adam
No,prijzen
prices will
never
Nee,
zullen
nooit
fall again
meer
dalen
Source: ING Financial Fitness Barometer
Virtually everyone believes that Amsterdam homes are overvalued
Dutch/Amsterdam house prices are currently...
Amsterdam
Amsterdam
94%
The Netherlands
Nederland
4% 1%
54%
Overvalued
Overgewaardeerd
34%
Accurately
valued
Goed gewaardeerd
12%
Undervalued
Ondergewaardeerd
Source: ING Financial Fitness Barometer
Conclusion: current development in sentiment...
points to weakening:
ING Economics Department
57%
21
increases risk of correction:
Pricing on the Amsterdam housing market / January 2017
Conclusion - What risks does a buyer run?
Conclusion
Owner-occupied homes in Amsterdam are increasingly less affordable.
This should drive down the demand for homes in the capital, which will
result in smaller price increases. If house prices nonetheless continue to
rise strongly, this is because the nature of the demand is changing.
‘Regular’ home-buyers who want to buy a home in Amsterdam without
help are facing more and more competition from private investors or
buyers with wealthy parents. In a situation in which prices are rising
rapidly, it is also appealing to think that these will continue to rise
strongly in the future as well. These developments increase the risk of
a downward price correction resulting from an economic shock. House
prices can certainly continue to rise for years, but a warning is called for.
What risk does a buyer run?
Although the risk of a price correction is increasing, this does not mean
that buyers themselves run more risk. After all, new regulations stipulate
that buyers cannot take out as large a mortgage as in the past, relative
to the value of the house (LTV). They are also required to be making
repayments on the principal. If a price correction occurs, home-owners
who recently bought a property will not immediately be ‘under water’,
therefore. This did happen during the crisis. Still, it would be wise for
anyone considering buying a home in Amsterdam to ask themselves
a number of questions in order to estimate their personal risk:
ING Economics Department
Estimate personal risk
1. Am I realistic?
First-time buyers who want to live in Amsterdam for a few years before trading up to a different
home must not automatically assume they will be able to realise substantial equity. The same
holds true for investors who enter the market with the goal of making a quick profit selling the
property on.
2. How much of a price drop can I afford?
First-time buyers are required to make repayments on the principal, but these repayments are
still limited in the first years after the purchase. After the first 5 years, about 11% has been
repaid, assuming today’s interest rates. With the maximum permitted mortgage of 101% LTV,
this means a price correction of about 10% can be cushioned without home-owners facing
negative equity. If a mortgage has been taken for just 90% of the home value, a price correction
of 20% can be cushioned.
3. How stable is my income situation?
Poor affordability means high monthly costs. If the mortgage is based on two incomes, it is
important to estimate how likely it is that the incomes will be available for the long term. If one
of the two household partners experiences a drop in income, will the household still be able to
pay the mortgage?
22
Pricing on the Amsterdam housing market / January 2017
Thanks to
Colophon
Matthieu Zuidema
Land Registry Office
Senne Janssen
Marcel Warnaar
Nibud
Ger Jaarsma
Gerco van den Berg
NVM
ING Economics Department
[email protected]
Maartje Martens
Pararius: https://www.pararius.nl/nieuws
Wim Flikweert
Marieke Blom
Marten van Garderen
Maurice van Sante
Arjen Boukem
Rico Luman
Dimitry Fleming
ING Economics Department
ING
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ING
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was completed on 9 January 2017
23
Pricing on the Amsterdam housing market / January 2017