Will house prices fall? Many people are asking themselves this question right now. Interest rates are rising. Consumer confidence hasn't been this low since 2002. Inflation is going up. Should you buy a house now? Will house prices fall? Are we buying a house at the peak of the market? Is it actually smart to buy a house now?
Contents
- 1. Learning from the past
- 2. Affordability is hugely important
- 3. Demand is greater than supply
- 4. Is every crisis a danger?
- 5. Is the number of transactions the predictor of price development?
- A very important difference in the housing market
- High inflation
- Conclusion
1. Learning from the past
To be able to answer our clients' questions, I look at the figures from the past. There were two big falls in the housing market: in 1978 and in 2008.
The credit crisis began in 2006. But prices kept rising back then. In the summer of 2008, prices rose to record highs. In the Netherlands we thought it would pass us by. That the scarcity of houses would mean we wouldn't be dragged into the crash. Yet we were. For about 5 years our house prices fell. Homes were under water and homeowners were forced to sell. In Utrecht, prices fell by 16.6% in 5 years.
2. Affordability is hugely important
I pointed out earlier that affordability was the most important factor when interest rates rise. With a high interest rate, the loan is more expensive. With a more expensive loan, less can be paid for the property. A higher interest rate means a higher risk. With a lower interest rate, the loan is ‘cheap’. It's no coincidence that in recent years people were saying there was ‘free’ money. This caused an enormous rise in house prices.
Rising mortgage rates mean, if you apply the elasticities from your economics lessons, falling prices. But is it that simple in the housing market?
In the 1970s and in the years after 2000, mortgage rates rose too. But house prices rose along with them. After the crisis broke out in 2008, interest rates fell. But house prices fell too. So can't we apply our economics lessons to house prices after all?
Will house prices fall if only the mortgage rate rises? After all, this is not the only component that influences house prices. Just as demand for homes does not always follow the rules of supply and demand in the rest of the economy. The housing market is determined by several factors and is therefore hard to predict using stand-alone rules.
Borrowing capacity is particularly important in the housing market. Until 2008 interest rates rose, but borrowing capacity was also expanded. This meant people could borrow more. There was confidence in the market and borrowing capacity increased. The high interest rate was even quite attractive tax-wise because of the generous mortgage interest relief. Not a cloud in the sky, so keep on bidding!
After 2008 interest rates fell, but all the rules were tightened considerably. In 2008 a home was often already under water. Back then you were still allowed to borrow more than the home was worth. On top of that, at that time you could still take out an interest-only mortgage and deduct the mortgage interest. From 2013 the borrowing capacity of 106% of the home's value (meaning you didn't need to bring any of your own money to buy a home) was reduced in steps to 100% of the home's value.
At the moment interest rates are rising at a rapid pace. On the other hand, the rules for two-income households have been relaxed. Both incomes may now be counted in full (100%) in mortgage calculations. That means two-income households may borrow more despite rising interest rates. A rising interest rate also doesn't always mean your borrowing capacity gets smaller. On top of that, I'm already hearing various friends around me say they have asked for (and got) pay rises because of inflation.
3. Demand is greater than supply
Here's that rule from economics class again: if demand is greater than supply, the price will rise. Since the Second World War we have had a housing shortage. There is more demand than supply, which has made homes ever more expensive. But, as mentioned earlier, this is not the only factor determining rising house prices. Affordability has a much bigger influence on the price of a home than the housing shortage.
Source: Midas
We have enough living space in the Netherlands, but we simply live in homes that are too big. We keep wanting more, bigger and better. In recent years, with low interest rates and rising prices, it was even very advantageous to move to a bigger home. But what is the solution?
We need to build more houses or make better use of our square metres to give more people access to the housing market. However, more homes does not automatically mean a fall in house prices. And fewer homes does not automatically mean a rise in house prices. Here too, it's all about the affordability of a home. It's about what you are allowed to borrow and how much of their own money someone has. So here price elasticity does matter. The lending standard has a bigger influence on the price of a home than scarcity in the market. The more can be borrowed and the more of their own money people have, the higher the purchase price will be. Once the ceiling is reached, the price will fall. Even though there may still be 100 people who want to buy the home. If none of them can borrow any more, the price will not rise any further.
4. Is every crisis a danger?
Not every crisis is a housing crisis. The oil crisis of the 1970s was severe, but house prices simply kept rising. In 1977 the biggest price rise ever was measured: around 40%. Only in 1979, when interest rates became so high that they exceeded inflation, did the housing market go into a downward spiral. The fall in house prices then lasted around 15 years. It wasn't until 1993 that house prices were back at the 1979 level.
The coronavirus crisis did the opposite to the housing market. In the first weeks it made people panic. After that, prices went through the roof. Interest rates rose slightly, but then fell. People were willing to spend more on a house. Home workspaces were needed, a garden or good outdoor space became important, and prices went completely through the roof.
In 2008 the credit crisis left homes under water. People lost their jobs, their home was under water and bills could no longer be paid. Banks announced that the home had to be sold. There was no free choice any more. This caused a sharp fall in house prices.
But in 2000, the dot-com bubble did not cause a crisis in the housing market. So you can see that government stimulus is of great importance in the housing market.
5. Is the number of transactions the predictor of price development?
When house prices rise, more and more homes are sold. Buyers are afraid the home will be even more expensive next month. The rise makes them greedy. They want to ‘belong’. To be able to count themselves rich too. If the rise continues, the market boils dry. People then stop moving through the market. They wait to sell and it becomes increasingly difficult to buy. This happened in 2008 too. Transactions decreased, the housing market crashed and prices fell.
People waited to buy, because next month and next year homes would be even cheaper.
Source: Brainbay
Source: Brainbay
A very important difference in the housing market
In 2008 it was attractive to wait, since mortgage rates were falling. So homes became cheaper not only in absolute terms, but also a lot cheaper in relative terms. Inflation was also a lot lower in 2008. So everything became relatively cheaper. Because of the low inflation and falling interest rates, it paid to wait before buying a home. In addition, homes had to be sold under duress. There was much less money in the market to absorb the blows. Moreover, the influence of the media was much smaller in the previous crisis. Once the media announced that house prices were falling, people suddenly assumed that all prices had fallen and that it was no longer smart to buy a house. I hear people saying now: ‘Oh, those houses keep getting cheaper. I'll wait a bit longer.’ But is that actually smart?
Interest rates are rising and inflation is going up. Building material prices are also rising enormously, pushing up the costs of new-build and renovation. On top of that, demand for staff is huge. Wages keep rising. If you then look at affordability, which comes up in just about every blog, it's smarter to buy a home now. Maybe there's a slight breeze at the moment. With rising interest rates, a home may become slightly cheaper in absolute numbers for a few years, but if you look at your monthly costs it becomes more expensive. I held a poll on Instagram. People thought it wasn't a good time to buy a home. They thought prices would fall and interest rates would rise. When I gave a few examples of rising material prices and rising labour costs, people thought it was smart to buy a house after all. So it's very difficult to make a call if not all factors are taken into account.
Rental prices
And have you read the articles about rental homes? Rents only keep going up. Why is that? Well, because of all the measures aimed at keeping investors out. Rents are rising because of inflation and supply and demand. So renting keeps getting more expensive. The gap between a rental home and an owner-occupied home therefore keeps growing too. So it's still more advantageous to buy and pay off a mortgage.
High inflation
Will house prices fall when inflation is this high? High inflation will make wages rise, which increases borrowing capacity. At the same time, borrowing capacity decreases because of rising interest rates. As a result, our money is worth less. So with high inflation it's smart to put your money into bricks and mortar.
Conclusion
It's not that smart to wait until a home has become worth less. Per month, that home, which may be worth just a little ‘less’ in absolute numbers, has actually become more expensive. What's more, prices (almost) always rise faster than they fall. By buying, you pay off your loan and you're protected against high inflation. In the long term, property always becomes worth more. Finally, you pay off a loan when you buy a house. The higher the interest rate, the less you pay off. At the moment, interest rates are still historically low in relative terms. So if I were you, I'd make use of the breeze and buy a lovely new house as soon as possible!
