What will 2023 be like for... the housing market?

Historic labor market tightness, sharply fluctuating stock prices and inflation reaching into the double digits. 2022 has been quite an eventful year economically. But what will 2023 bring us? In this series, Charles Kalshoven, macroeconomist and senior strategist at APG, explains what we can expect in the coming year with respect to our purchasing power, the labor market and investments, among other things. Today part 3: What 2023 will be like for the housing market?

The overheated housing market of recent years tempted RTL to produce the TV program Kopen zonder kijken (Buying Site Unseen). People who had trouble finding a suitable home turned to that program to figure out how to be able to buy their own home. Kalshoven expects that in 2023, it would be better for this format to be changed to a variant where not buyers, but sellers are helped. After all, homes are getting cheaper, giving buyers more to choose from. On the other hand, the cost of living for an owner-occupied home is increasing due to increased interest rates. This makes it (even) more difficult to find a home, especially for first-time buyers.

Demands
A cooling housing market follows a set pattern, Kalshoven says. “Realtors first notice that the influx of viewers decreases, but still manage to sell homes at good prices. Then comes a period when houses are for sale for longer, which leads to an increase in supply. This is because sellers have a price in their heads and don’t want to drop it too quickly. The number of transactions then decreases, something you are already seeing. In recent years, potential buyers regularly waived all kinds of requirements, such as an architectural inspection, for fear of missing the boat. That period is over for now.”

Buyers may be getting more critical, but at the same time, mortgage costs are rising. “The rise in interest rates from roughly 1.5 percent at the beginning of this year to 4.5 percent now means that an annuity mortgage becomes almost 50 percent more expensive per month gross. Net, the difference is smaller. First, the lion’s share of monthly payments consisted of repayment. Now the bulk is interest - and you can deduct that from your taxes. In the first year, the net monthly costs are therefore ‘only’ 27 percent higher. But don’t forget that over time, a larger part of your monthly amount will be repayment and a smaller part will be interest. So, in the end, in year 30 - in which you almost only repay – you’ll be paying 50 percent more than before.” According to Kalshoven, falling house prices do not outweigh this: “According to the Central Bureau of Statistics, house prices in October were about 1.5 percent below the peak, the Dutch Association of Realtors saw prices fall by 6 percent in the third quarter. To end up with lower monthly costs, you need a drop of a quarter or more. I don’t see that happening any time soon.”

Jubelton
The increasing cost of housing is also reflected in technology company Calcasa’s affordability index. Kalshoven: “That index looks at average net wages and net housing costs. Right now, people are spending an average of 20 percent of their income on housing. Between 2014 and early this year that was less than 15 percent. Between 1999 and 2012, incidentally, it fluctuated between 20 and 27 percent.” Rising mortgage interest rates are also resulting in lower confidence in the housing market. The indicator that Vereniging Eigen Huis (Own Your Home Association) has for this is at its lowest point since September 2013. First-time buyers in particular, are affected by the rising interest rates. After all, they have no surplus value from a previous house. Also, the Jubelton (tax-free gift for buying a house) is disappearing. This year, parents can still give 106,671 euros tax-free to a child for the purchase of a house, next year it will be 28,947 euros. In 2024, the scheme will be abolished altogether.

Kalshoven expects house prices to fall by up to 5 percent next year. This is a far cry from the price declines after the 2008 credit crisis. “A few things are really different now. There is a long wait for a social rental house and rents in the free sector are high. This keeps it interesting to buy, even though people can now offer less because of higher interest rates. At the same time, new construction is stagnating, due to both the nitrogen problem and the construction labor shortage, and thus the housing supply.” Normally, the housing market only goes bad when many people have to sell their homes, for example, because they become unemployed. Because of the tightness in the labor market, however, that is unlikely, Kalshoven said. “In addition, homeowners are less likely to get into trouble now because the conditions for obtaining a mortgage have become stricter in recent years. You can’t borrow more than 100 percent and you start repaying right away. And then many homeowners still have excess value on their homes due to the sharp price increases of recent years.” Consequently, the housing market is in a much more solid position than it was in 2008.

The state of the housing market affects the economy, Kalshoven argues. “When house prices fall, people feel less wealthy. That results in them consuming less, but that doesn’t have to be a bad thing in this time of high inflation. It is also better for the planet. Some sectors may suffer to some extent from the fact that there are fewer transactions in the housing market. Examples include kitchen retailers and interior design stores. After all, a new house is often the time for a new kitchen or flooring.”

Outcome
Next year, we can expect a slight drop in home prices, which may encourage the buyers to be more critical than in the overheated housing market of recent years. However, the price decline will be limited to about 5 percent, due to the housing shortage and the fact that the labor market is in good shape. For first-time buyers, homeownership will remain difficult to achieve, as the decline in home prices is offset by increased mortgage interest rates and the elimination of the Jubelton. Looking at houses will be easier, as they are less likely to disappear from the market, but buying will put a greater strain on the wallet. Many a starter will opt for “looking without buying” in 2023 for that reason.