‘Has the housing market reached its tipping point?’ That was the headline of a blog in July 2019. Economists wrote about it, everyone was saying it. Almost every viewing began or ended with this question. The credit crunch was still fresh in people's minds. People hesitated. Should they get in or not? Would the bubble burst, leaving them straight away with a home that was under water? I was sure that wouldn't be the case. Even though the opinion-makers like to make us believe otherwise with their distorted little graphs.
Contents
- House price bubble
- Obligation to repay
- Low interest rates and the obligation to repay
- House hopping
- A bubble? Or actually undervaluation
- Drop-outs and rising interest rates
- Do we want the bubble to burst?
House price bubble
When are we dealing with a house price bubble? For a house price bubble, people look at the ratio between the average house price and income. If this ratio stays high for a long time, there's a bubble. Then you look at price elasticity – you know, that concept from economics lessons at school, where supply and demand meet. If prices get too high, demand falls. Households can then no longer afford to buy a house.
So if you only look at the ratio between absolute house prices and income, you see that this ratio has been rising for a very long time. You'd say there's most definitely a house price bubble here. It's bound to burst soon. I'll wait patiently for the bubble to burst and then I'll buy.
But in this case I don't believe it. This ratio doesn't take the interest rate into account. House prices are indeed rising relative to income, but affordability is still good. With a low interest rate, housing costs come down. As interest rates fall, house prices do rise. The ratio of monthly housing costs to income isn't rising. Thanks to falling interest rates and huge amounts of equity, houses are actually becoming more and more affordable for the current group of homeowners. So the high house prices don't lead to payment problems.
Obligation to repay
They also forgot another important aspect. These days we pay off the mortgages on our homes. If you have a linear mortgage, your monthly payments get a little lower all the time. Because of the high equity, you also see costs falling. The interest rate surcharge disappears when a home's value is higher. This lowers the costs. On top of that, interest rates have kept falling further. Many households fix their rate, and at the moment you see that when the fixed-rate period ends, households fix the rate again for longer at a very low percentage. This increases affordability once again. When people move house, there's suddenly a huge sum of money. Because they take it with them to their next home, you see a chain reaction.
Low interest rates and the obligation to repay
According to the authors, the low interest rate is also overlooked. When interest rates stay low for a long time, a high house price doesn't have to lead to unaffordable monthly costs. According to Boelhouwer et al., the old model also fails to take into account that since 2013 mortgages have had to be (partly) repaid. Before then, calculations were based on interest-only mortgages, so housing costs remained fairly constant relative to the house price. Because of the mandatory annuity (at the very least) or linear repayment, those costs will actually fall over time.
House hopping
Our housing cost ratio is fairly constant. In the Netherlands, when we qualify for a bigger mortgage, we generally buy a more expensive home fairly quickly. When interest rates rise or fall, or when income rises or falls, we adjust our homes. As a percentage, we keep spending roughly the same on our home. Funnily enough, I wrote this recently in a blog too. At the moment interest rates are so low and we earn relatively well. On top of that, we all have relatively high equity. Because we keep spending the same percentage on housing costs, prices are rising enormously. So in effect you have huge housing inflation.
A bubble? Or actually undervaluation
If you look at the long-term equilibrium based on monthly housing costs relative to income, there's more a case of house prices being undervalued than overvalued. It's a good example for ourselves, too. Two and a half years ago we bought the house we live in now. We had it thoroughly renovated and remodelled. But we still have a higher interest rate. We've also built up a lot of equity in the meantime. If we were to move now to another house worth around €150,000 more, we'd be paying slightly less per month than we're paying at the moment. So it would be very advantageous for us to pack up our things again after 2 years and go. ‘This is different from the situation before the financial crisis of 2008. Back then, the price level was actually somewhat above the equilibrium value. The chance of slower house price growth was real. Subsequently, the financial crisis of 2008 did indeed cause prices to fall by about six per cent in the period 2008–2011.’ With the current levels of income and interest rates, prices could be much higher still. In the period from 2013 to 2016 we also had it very good if we wanted to buy a house. That has spoiled us a bit.
Drop-outs and rising interest rates
First-time buyers – yes, for them this is a really sad market. If your parents don't own a home on which they can increase their mortgage on relatively favourable terms and give you a hundred thousand euros, you don't stand a chance. As a first-time buyer without assets, you have nowhere to go. That's a big problem in the market. Gifting the jubelton (the tax-free gift of up to around €100,000), abolishing transfer tax – it all sounds great. But it's mainly nice for the current owners of property. For first-time buyers it really makes no difference. Households with the least purchasing power really have a problem in this market. They have to pay high rents and save very hard.
Do we want the bubble to burst?
Everyone is shouting that it's a shame for first-time buyers and that buying is impossible. But do we really want the value of our homes to fall? No, secretly we don't. It feels wonderful to have so much ‘money’. We can use it to hop to seriously big houses. So we're not all that loyal to first-time buyers after all. There will have to be building. Especially for first-time buyers. First-time buyers will have to cross a few requirements off their very long wish list. The government will have to make the places where building will take place attractive, but above all easy to reach. We simply have too few homes. But on average we also live too spaciously in the Netherlands. Nobody wants to spend hours on public transport to get to work, and hardly anyone wants just the Spar as their supermarket.
So will you get in now, before prices rise even higher? Take a look at our listings.
