How the 2023 housing market has affected mortgage interest rates

The Dutch real estate landscape has exhibited remarkable resilience, as evidenced by recent market developments. Hanno explains. 

After hitting an all-time high in May 2022, the housing market experienced an abrupt and significant drop of more than 10 percent in the second half of the same year. This unexpected turn of events heralded a period of uncertainty.

However, despite this setback, the market is now undergoing a remarkably swift recovery. This rebound is validated by several indicators:

• Prices are steadily rising
• Price per square metre is rising
• The supply of houses has increased
• The number of transactions in the housing market has shown an upward trend

A year ago, overbidding - or paying more than the asking price - was the norm when buying a house. This happened much less frequently in the second half of 2022 and the first quarter of 2023. However, overbidding has become common again. As seen in the image, by the spring of 2023, nearly six out of 10 houses were already being sold above the asking price.

There are opportunities for people who can renovate their homes by themselves and are not dependent on a contractor. Due to the high and uncertain costs of remodelling and renovation, buyers are very cautious when bidding on houses with overdue maintenance or an outdated interior. This causes a diminishing effect on the prices of homes that need renovation.

It appears that the housing market in the Netherlands is resilient and can adapt to varying economic circumstances, thereby laying a strong foundation for the future.

Mortgage interest rate for 2023

When interest rates decrease, property prices tend to rise further. This is what we saw until the first few months of 2022. The reverse is true when there is a sharp increase in interest rates, causing housing prices to fall. The past year amplified this trend due to the shock effect: the interest rates rose so quickly that consumers, and therefore homebuyers, couldn't prepare or adjust in time. This led to panic and a buyer's strike, resulting in significant price drops.

However, the mortgage interest rate in the Netherlands has now stabilised at around 4 percent. Compared to a year ago, mortgage interest rates might seem high, but historically, rates between 4 and 5 percent are considered quite normal.

This is a result of a simple calculation: a 2 percent inflation rate, which is the goal of the European Central Bank (ECB), plus a 1 percent surcharge for risk and banking costs to find a “normal interest rate”, with an additional 1 percent surcharge for costs, risks, and profits for mortgage providers. Please note that this is a very rough calculation. But it at least indicates that it's highly unlikely that the low mortgage interest rates from the recent past will return anytime soon.

The high inflation rate tends to put upward pressure on interest rates. On the other hand, the ECB will not want to let the interest rate rise too sharply in order not to harm economic growth. Therefore, we expect the current mortgage interest rate to remain approximately at the current level for the time being.

To buy now or wait?

Many homebuyers are wondering whether it's wise to buy a house in the Netherlands now or to wait.

Generally speaking, rushing to buy or choosing to wait is always speculative. Nobody can predict the future, which is why our advice has remained unchanged for years: you buy a house to live in. Owning your own home provides more choice, flexibility, and freedom. And in the long term, it is almost certain to offer an attractive return.

Nevertheless, we believe that prices will continue to rise in the coming years. Here’s why:

1. There is a significant shortage of housing in the Netherlands, particularly in urban areas. —> This creates an upward effect on prices.
2. The shortage is set to worsen due to a decrease in new construction (caused by high material costs and strict nitrogen regulations set by the government) —> This results in an upward effect on prices.
3. Interest rates seem to be stable at a new equilibrium. —> This leads to a neutral effect on prices.
4. Economic and political uncertainty such as high inflation, high energy costs, and the situation in Ukraine are causing fear and uncertainty. —> This has a downward effect on prices.
5. To compensate for high inflation, wages are increasing rapidly. Due to strong legal protection against over-crediting, maximum wages have a strong effect on the maximum purchasing power of potential buyers. As a result, the percentage of their income people may spend on their mortgage will cause maximum mortgage amounts to rise more than inflation. —> This results in a strong upward effect on prices, particularly in the segment up to approximately 500.000 euros.

Housing market expectations for the second half of 2023

We expect that the recently initiated rise will accelerate after the summer holidays. By that time, many buyers will have experienced the positive effects of wage increases and will be even more accustomed to the current interest rates. Due to the crisis in new construction, the supply of new homes will further decrease, increasing the pressure on existing buildings.

No rights can be derived from this article. Always go to an experienced advisor for mortgage advice.

If you want to learn more, Hanno organises a free webinar How to buy a house in the Netherlands, specially for expats. During the webinar, their mortgage advisors teach you everything you need to know about house buying in the Netherlands.