DNB: Housing prices fall in 2023, recovery expected in 2025

Outlook for the housing market in the Netherlands shows that De Nederlandsche Bank (DNB) expects a downward correction of 5.1 percent in house prices throughout 2023 compared to the previous year. This revision is lower than the earlier forecast made last December. A decline is also predicted for 2024, but with a smaller decrease of 3.8 percent compared to this year. However, DNB predicts that house prices will rise after this period.

According to DNB's scenario, house prices at the end of next year are expected to be about 10 percent lower than their peak in 2022. Given the sharp rise in house prices in recent years, this is a relatively small decline. While DNB acknowledges that falling prices may pose a risk to households, the cooling of the housing market is not expected to create financial stability risks.

Lower home prices due to rising interest rates

The cooling of the housing market manifests itself in a decrease in transactions and lower prices. This development can be attributed mainly to the rise in mortgage rates. While in June last year you could take out a mortgage with a 10-year fixed rate at 2.88 percent, this interest rate now hovers around 4.02 percent. The resulting higher monthly costs lead to less financial room when buying a home.

Higher interest rates are not expected to change soon, although average mortgage rates have fallen slightly in recent weeks. Central banks, such as the ECB, have repeatedly raised key interest rates in recent months in the fight against inflation. Controlling the sharp increases in prices, which are evident when shopping, is proving challenging.

Housing prices expected to rise in 2025

After 2024, DNB expects a recovery in housing prices. This recovery will still show a slight increase of 0.2 percent in 2025. In particular, the recovery of household incomes is the reason for this expectation. In addition, there are other factors supporting house prices:

• Low unemployment: Unemployment is at historically low levels. As a result, many people have jobs and a relatively large number of households have sufficient income to buy their own homes.
• Limited new construction: Construction of new homes is struggling. The Economic Institute for Construction (EIB) fears that about 6.5 percent fewer new homes will be completed this year compared to 2022. Next year the drop will be even greater, with an 8 percent decrease. Instead of the desired 100,000 homes, only 66,000 will be built. This is significantly less than needed to meet demand. The lack of supply is putting a floor under housing prices.
• Surplus value of homes: Despite falling home prices, some homeowners have excess value on their current home. This excess value can be used to purchase the next home, which can offset the effect of increased mortgage interest rates.

Reasons for lower new construction and construction delays

DNB points to the slowing effects of nitrogen rules on new home construction. An important aspect is that developers are facing rising construction costs. Both construction materials and financing for new construction projects have become more expensive. Moreover, potential buyers are no longer lining up to sign up for new homes, increasing the risk of temporary vacancy for developers.