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The Problematic Relationship between Supply and Demand for Residential Mortgages in the Dutch Mortgage Market

This article discusses the current crisis in the Dutch housing market, with decreasing house prices, a decline in the number of transactions, and increasing defaults. The mortgage market plays a crucial role, but there is a large funding gap and difficulties in refinancing securitized mortgages. High mortgage interest rates and limited supply contribute to the rejection of applicants. Various measures have been taken, but they are not enough to solve the problems. The article proposes creating a national SPV and lowering the threshold for pension funds to invest in Dutch mortgages as possible solutions.

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The Problematic Relationship between Supply and Demand for Residential Mortgages in the Dutch Mortgage Market

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  1. The Dutch mortgage market at a cross road?The problematic relationship between supply of and demand for residential mortgages22/03/2013 Vereniging van Onroerend Goed Onderzoekers Nederland

  2. Housing market in crisis • House prices down • Number of transactions down • Increasingnumber of householdsunder water • Increasing (yetstillrelatively low) number of defaults • Mortgage market playsan important role • Large funding gap with Dutch banks (500 bln) • Difficultrefinancing of securitizedmortgages • Mortgage interest rates high • Supply is limited: small “imperfections” seemto lead torejections Vereniging van Onroerend Goed Onderzoekers Nederland

  3. Housing market in crisis • House prices down • Number of transactions down • Increasingnumber of householdsunder water • Increasing (yetstillrelatively low) number of defaults • Mortgage market playsan important role • Large funding gap with Dutch banks (500 bln) • Difficultrefinancing of securitizedmortgages • Mortgage interest rates high • Supply is limited: small “imperfections” seemto lead torejections Vereniging van Onroerend Goed Onderzoekers Nederland

  4. Vereniging van Onroerend Goed Onderzoekers Nederland

  5. Vereniging van Onroerend Goed Onderzoekers Nederland

  6. Vereniging van Onroerend Goed Onderzoekers Nederland

  7. Very lively debate – policy in the fast lane Some highlights signaling the problem: 02/02/2012 Six steps to more durable housing market Plan by 22 economists to reform the housing market, includes reform of the funding of mortgages 10/05/2012 Importance of reducing funding gap Financial stability; trust in Dutch market 14/02/2013 CPB report on mortgage interest rates High mortgage interest rates not explained by high financing costs, rather lack of capacity, competition 01/03/2013 DNB report on mortgage interest rates High mortgage interest rates partly explained by high financing costs, also lack of competition Vereniging van Onroerend Goed Onderzoekers Nederland

  8. In need of a solution – whathappenedso far: • Tightening of credit conditionsLTI: Code of conduct 2007 – onwardsLTV: Code of conduct 2011 – onwards • Restricting (one) fiscal stimulus formortgagedebtMaximum of 50% non-amortizing (Code of conduct 2011)No more interest deductibilityfor non-amortizingloans (01/01/2013) • Residualdebtslightly more fundableEligiblefor interest deductibilityduring 10 years (29/10/2012) Vereniging van Onroerend Goed Onderzoekers Nederland

  9. Thiswillnotbeenough: • It does not help householdsunder water muchNo rulesregarding the way tofinanceresidualdebt (i.e. high price)Restriction of 10 years impacts debtcapacity • Demandformortgage credit willincreasefunding gapAutonomoushousing market processesIssues with respect tolimitedandexpensivefunding of mortgages Vereniging van Onroerend Goed Onderzoekers Nederland

  10. Restricted finance affects predominantly young households Relative occurance of residual debt among home-owners Vereniging van Onroerend Goed Onderzoekers Nederland

  11. Restrictive impact of financing residual debt on debt capacity Remaining debt capacity at various levels of amortization (assumed annual income € 50.000) Vereniging van Onroerend Goed Onderzoekers Nederland

  12. Autonomous housing market processes will increase total debt Development mortgage debt, various scenarios Vereniging van Onroerend Goed Onderzoekers Nederland

  13. Increasetotaloutstandingdebt • Funding gap willincrease, despitemeasures on housing market • Banks remainconfrontedwith high(er) fundingcosts • Banks remaindependent of internationalcapital market • Solution? • 11/03/2013 Van Dijkhuizen • Createnational SPV that issues bonds on already state-securedloans • + Lowersthreshold pension funds toinvest in Dutch mortgages • + Lowersuncertaintyinternationalinvestorswith respect toquality NHG • - Banks remainwith smaller, albeit more riskybalance • - Housing market neednot benefit Vereniging van Onroerend Goed Onderzoekers Nederland

  14. Conclusions • Housing market malfunctionspartlybecause of problematicbalances of banks • Funding gap willincrease, despitemeasures on housing market • No solution forresidualdebtrelatedproblems of large group of households • Agenda • Clarify details on Van Dijkhuizen • Reform of funding system mortgage market • Started reform of housing market needs continuation Vereniging van Onroerend Goed Onderzoekers Nederland

  15. Vereniging van Onroerend Goed Onderzoekers Nederland

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