What is the euro actually worth? I used to really think you'd made it if you could live in a house worth €500,000. Half a million. How much money is that? But what does €500,000 still buy you today? In Utrecht, not all that much any more. A house of about 80 m2, finished to an OK standard in an OK neighbourhood. You won't get much further than that at the moment. We're constantly comparing, and that's how we try to estimate the value of money. But what if all the factors change fairly quickly? Are we still making the right comparisons then?
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More demand than supply
The Dutch population is growing fast. For many years now, we've had too few homes relative to our population. During the crisis, however, affordability, feasibility and consumer confidence were a lot lower. As a result, fewer homes were sold and relatively more supply was available.
Affordability
Everything is connected to the affordability and financeability of a home. The fall in mortgage rates has led to higher home values. People could buy a more expensive house for a lower amount per month. That's how you saw prices slowly rising. Interest on savings is currently even negative. So it's more advantageous to put your wealth into a house or to buy an investment property. In 2018, the interest on savings rose slightly again. Very briefly, at the start of 2019, you even saw homes selling a little less easily. But when the news about nitrogen and construction freezes came out, demand rose. People were afraid that the scarcity would make homes even more expensive. Corona made people realise that they might be living in a home that was a bit too small, and that if you can't spend your money on luxury trips, restaurants and bars, and festivals, you can spend more money on your home. So here too you saw an enormous rise in home values.
Source: Midas
Source: Midas
In 1995, home prices rose enormously. Here too you could see that this was down to affordability. Interest rates plummeted. Affordability increased and prices rose.
More women in work
We hear a lot of people complaining. In the past you could still buy a house on one salary. Usually a house was bought on the man's salary alone. But more and more women have taken on paid work alongside their caring responsibilities. Here affordability comes into play again. There was a larger combined household income. Not only have mothers started working more often, they've also started working more hours. At the same time, the majority of working women still have a part-time job. Most women work part-time. They work around three to four days a week. More and more women have taken on more senior positions. The youngest generation is sometimes already outpacing men in terms of job level. Women's economic independence has also increased, but is still clearly below that of men. In the image below you can see the distribution of women born between 1955 and 1960 and between 1975 and 1980, and the percentage working with and without children. You can see that the total number of working women has risen enormously.
Source: CBS, Education and work: comparing two generations of women
Because total household income has risen, the percentage a household can spend on a home has risen. Because we've had too few homes for years, and there is therefore pressure on the housing market, home prices are increasing.
In short, the more we all earn, the faster house prices rise.
Inflation
Inflation, as it is currently calculated, isn't that high. Interest rates are being kept low to help push inflation up. But why aren't house prices included in inflation? By keeping interest rates artificially low, the affordability of a house is good. This creates an enormous amount of surplus equity for many people. Money they wouldn't otherwise have had.
The European Central Bank (ECB) is sticking to historically low interest rates in order to help inflation in the eurozone towards 2 percent. The bank expects to keep these historically low rates until the 2 percent target has been reached.
The central bank is aiming for inflation of 2 percent to prevent deflation, in which prices fall and consumers may postpone spending. With inflation above 2 percent, the chance grows that prices will rise too quickly. As a result, people's savings lose value and they can buy fewer products with their income.
So you can see that inflation on homes is now rising too fast. People can now buy less house for the same amount.
Perception
Still, for homeowners it feels good that home prices are rising. You now pay more for a home than before. But in terms of how it feels, we currently have much more wealth. The loan-to-value is better, because a large amount of surplus equity is created. A small example. If inflation is 4% and we get a 2% pay rise, we're reasonably satisfied. If inflation is 2% and we have to give up 2% of our salary, we feel enormously hard done by. In fact, the gap with inflation is the same size. But giving something up always feels bad. It's as if something is being taken away from us. Whereas when you get something extra, it feels better, even if your purchasing power is the same or lower.
It's precisely this feeling that leads us all to cash in our surplus equity, and the pressure on the housing market rises.
Conclusion
What our euro is 'worth' depends on a great many factors. Inflation, affordability and perception are the most important pillars of a home's value. So what is that euro worth on the housing market now? We actually always pay a certain percentage of our income on housing. Sometimes a bit more, sometimes a bit less. Every situation is different. But on average we pay 30% of our income on our housing. The more we earn and the lower interest rates are, the higher the value of homes will be.
