Mortgage rates are rising after falling further and further for years. Now the world has been turned upside down. It's not just mortgage rates that are rising, but gas and petrol prices too. You can't open a news page or social media without seeing it. On our way to Austria we filled up with diesel at 2.55 euros per litre….
Inflation
We've written about inflation before. Inflation has risen sharply over the past year. In February 2021 inflation was 0.9%. In February 2022 inflation in the eurozone was 5.8%. This rise is mainly due to higher energy prices. In their policy, central banks always prefer to leave energy prices out of consideration. As they do food prices. That's because these prices can fluctuate enormously, which can give a distorted picture of inflation in the longer term.
In the Netherlands, inflation in February 2022 was 7.2%. That's extremely high. In January it was as much as 7.6%. At the moment inflation in the Netherlands is 6.4%.
But even if you leave food and energy prices out of consideration, inflation is still rising. The ECB is now starting to get worried after all. The ECB's task is to ensure moderate inflation in the longer term. It works with an inflation target of 2%, which is currently much higher. The ECB has to intervene if inflation rises too fast. It will have to raise interest rates. It does this by buying fewer debt securities and raising the official interest rates for commercial banks.
Source: CBS
Source: CBS
The ECB is very reluctant to make policy changes. In the ECB's view, the economic recovery after the coronavirus crisis is still too fragile. It considers the recovery from the pandemic still too uncertain to make major changes to monetary policy. In America, the first interest rate rises have already been implemented.
Expectations for the economic recovery
The ECB doesn't expect the rise in inflation to continue. At the moment many production chains worldwide are disrupted. There are lockdowns, transport problems and problems finding enough workers. There's insufficient production capacity. The ECB assumes these disruptions in production chains are temporary. It expects the supply problems to resolve and inflation to disappear then.
In addition, the ECB thinks that in the longer term structural factors that dampen inflation will gain the upper hand. One example is the slack in the European labour market. In the Netherlands we're short of workers. But that's not the case everywhere. So workers can be brought in from abroad. Another example: many companies have more production capacity than they're currently using. So there's a sizeable gap between potential production and actual production. According to the ECB, this indicates that companies have little pricing power. The danger of structurally high inflation is therefore limited.
Personally, I think this could turn out to be a nasty surprise. Because of the war in Ukraine, energy prices will keep rising enormously. I know people with a business who have been told they're using too much electricity. This business already has an enormous number of solar panels and generators, but it uses more energy than can currently be supplied. On top of that, high petrol prices will increase demand for electric cars. That also increases demand for electricity and, indirectly, for natural gas. If there isn't enough energy to keep businesses running at full capacity, prices will rise. There's also a huge scarcity of raw materials. Businesses are short of hands, and because of the pandemic the staff we do have are less available.
Still, the ECB isn't entirely sure of itself. After all, inflation keeps rising. In the US, the risks of a tight labour market, and with it structurally higher inflation, are greater than in the eurozone. The 10-year rate in America has risen, which has caused rates in Europe to rise as well.
Mortgage rates are rising
Inflation is high and keeps rising. The labour market is tight. Production capacity is limited. Geopolitical conflicts are causing unrest. Result: mortgage rates are rising. Risk premiums on the financial markets have risen because of the threat of war. Mortgage lenders have to incur higher costs to borrow money for the mortgages they provide. Although they probably won't pass these higher costs on in full, because competition in the mortgage market is extremely fierce.
So mortgage rates will have to rise somewhat. There's no other way. Inflation will keep rising for the time being and the threat of war remains too great. But we've seen this before. Right at the start of the coronavirus crisis you also saw mortgage rates rise. Risk premiums went up and made it more expensive for mortgage lenders to attract money. But thanks to the fierce competition, you also soon saw mortgage rates fall again.
So we expect mortgage rates to rise. Although they're still lower than last year, we also see house prices rising enormously. Last year house prices rose by about 22%. At the moment there are about 28,000 people looking for a house in the city of Utrecht, but only about 300 homes available. That includes new builds. Demand is extremely high. So we expect house prices to keep rising. But… the expectation is that house prices will rise less sharply than last year. The reason? The effect of the extremely low interest rates on the housing market will slowly disappear, the war between Russia and Ukraine will undermine consumer confidence and rising inflation will reduce purchasing power somewhat.
The tight labour market, limited production capacity, high inflation and scarcity of raw materials will make building houses even harder. Population growth is increasing. We have too few houses. This means that before long we'll be spending more on our housing costs. It all comes down to affordability. If you want to be sure of a comfortable home with acceptable housing costs, don't wait for house prices to fall. That could end up costing you dearly.
Want to get ahead? Make the most of historically low mortgage rates while you still can
Do you want to refinance your mortgage at a favourable rate while you still can? And do you need a certified NWWI valuation report for that? We'd be happy to come round. Even with an early repayment penalty, refinancing your mortgage can save a lot of euros per month. Lowering the risk surcharge also gives you an advantage. That'll pay for filling up the car once again. Be honest, it almost makes you want to cry, doesn't it?
Would you like to make the most of the historically low interest rates and buy a house before house prices and mortgage rates rise further? We'd be happy to help you with that too.
