Fragile eurozone economy induces ECB for further cuts

During the third quarter and most recently on October 17, the ECB reduced their policy rate, which is a continuation of the earlier cut in June of this year. In September the deposit rate was reduced from 3.75% to 3.50% followed by another cut of 25bp in October to 3.25%, see figure 1.

The rate cut in September had a more special character, as the main refinancing rate was reduced more than the deposit rate facility. In the end, the ultimate goal of this change in the ECB’s monetary policy framework, it to normalize the size of the ECB balance sheet and therefore the normalization of monetary policy. It goes into too much detail to elaborate on the reasoning why the spread between these two rates has been reduced, but for the interested reader we would like to refer to the following ECB article: Changes to the operational framework for implementing monetary policy.

What is relevant for the Dutch mortgage market, is what the ECB is expected to do in the coming months and what the impact will be on the (swap) curve. Will the yield curve slowly normalize in the coming quarters and away from the current inverse? To start with the latter. As figure 2 shows, since the first rate cut in June the short-end of the curve rallied significantly. For example, the very shortend of the curve moved 70bp up to the end of October. As the 10+ year sector rallied only 20bp or less, it’s clear that the curve is slowly but certainly starting to normalize. The 0-3 maturity bucket is still inverse, but either three or more cuts of 25bp or a significant change in ECB expectations could make the whole curve upward sloping again.

The October press conference of the ECB was surprisingly dovish. We mentioned in the previous quarterly update that the ECB was not in a hurry to cut rates, as the ECB mentioned that inflation risks are tilted to the upside. But last month the ECB made a twist, as they made clear that: with regard to inflation, there is probably more downside risk than upside risk 1. there are downside surprises in indicators of economic activity 2. 3.financing conditions remain restrictive In addition, euro area inflation dropped to 1,7% in September from 2,2% in August, and that was a surprise for the ECB. So this basically means that there is plenty of room for further rate cuts. Markets now expect for the coming December meeting at least one cut of 25bp and possibly more than 25bp. 

Lower rates and high wage growth positive for housing prices and arrears

For the Dutch mortgage market this means that mortgage rates will decline further across the curve, with a more pronounced decline in rates at the short end of the curve. In addition, the probability that consumers will aim for longer fixed rate periods may increase. But we have not seen that yet, as 80% of the new mortgage loan applications have a fixed interest rate period of 10 years or shorter. And that percentage has remained stable in 2024, despite lower mortgage rates. We will discuss this further in chapter 3 below. The gradual reduction in mortgage rates is good news for consumers, as it improves affordability for new home buyers. Also, wage growth has remained relatively high in 2024 and also the latest reading from October of 6,7% growth year on year is still solid, see figure 3. All in all, this is positive in terms of house prices and credit risks in mortgage portfolios.

Repayment Corona support drives corporate bankruptcies higher 

Despite positive economic growth in the second and third quarter of 2024, the number of corporate bankruptcies continued to increase. This is a trend that started in the fourth quarter of 2021, see figure 1.4 below. Over the past two years, the incidence of bankruptcies has doubled. But as figure 4 also shows, a year on year comparison can sometimes be tricky as the level of bankruptcies in 2023 was close the lowest level in 25 years. Although the number of bankruptcies is indeed increasing, it’s also moving back to longer term averages. Secondly, this rise is not currently alarming given the scale of the Dutch business environment, which comprises over 2.3 million companies compared to the 1,087 bankruptcies recorded in Q3 2024. These figures indicate that 0.05% of all companies went bankrupt in Q3 2024.

One significant factor contributing to the rise in bankruptcies is the obligation of many companies to repay financial assistance that was granted by the government during the COVID-19 pandemic, see the following article Verwachte faillissementsgolf geen reden tot paniek. Hence the current increase in also contains the postponed bankruptcies of unviable companies, which survived as a result of COVID-19 pandemic government measures. 

Dutch inflation remains elevated vs rest of Eurozone

Meanwhile, the labor market remains tight, characterized by a persistent imbalance between job vacancies and available workers. The unemployment rate in the Netherlands remains low, reflecting a tight labor market that has both positive and negative implications for the economy. The persistent labor shortage continues to put upward pressure on wages as mentioned above. This contributes to an inflation rate (HICP) that currently stands at 3.3%. In contrast, the annual inflation rate for the Eurozone has decreased to 1.7% in September compared to 2.8% at the beginning of this year, see figure 5.

The housing market remains under pressure, facing challenges similar to those in prior quarters. A continual imbalance between housing supply and demand is pushing prices higher. Consequently, For first-time buyers and others trying to enter the market arefinding it challenging due to rising costs and fierce competition for available homes. The Dutch economy continues to navigate a complex landscape of tight labor markets, inflationary pressures, and housing market challenges as it progresses through the third quarter of 2024. 

Plans of the Dutch Government to tackle the housing shortage 

 In the previous report we referred to the ‘Hoofdlijnenakkoord’ that was published by the new Schoof cabinet. During Budget Day (in Dutch: Prinsjesdag) more details were provided on the policy goals of the new cabinet. We have highlighted a few items that are relevant: 

1. Increase in purchase power: 

Purchasing power is set to improve for many individuals next year. On average, people are expected to see an increase in their purchasing power. The government is particularly focused on supporting vulnerable groups and middle-income earners through several key initiatives. The government is implementing a comprehensive package of measures, including increased child benefits, tax reductions for lower incomes, enhanced childcare subsidies, and improved housing benefits. These measures collectively aim to bolster the purchasing power of low- and middle-income households, helping them navigate rising living costs more effectively. 

2. Housing: 

The top priority of the government is to reduce the housing shortage. The plan to build 100,000 new per year remains. Two-thirds of this will be affordable to low and middle-income households. To support this plan, the government decided to allocate €5 billion until 2030. The government plans to increase land availability for housing and reduce construction barriers through the 'Versterking regie volkshuisvesting' law. This includes making building land more affordable and exploring a tax on undeveloped housing land to encourage sales. The government aims to accelerate housing construction by streamlining planning and permits, promoting standardised industrial methods, and targeting 50% of new homes to be built this way by 2030. For a more in depth analysis on the housing plans of the government, see: New Dutch government: Tackling the housing shortage is top priority and New Dutch housing plans: clear acknowledge of the problem but more budget and creativity is required. 

3.Focus on Energy Transition and Climate Adaption: 

The Dutch government aims to enhance housing sustainability and energy efficiency primarily to reduce energy costs for residents, focusing on improving insulation in existing homes and buildings. In parallel, it has allocated €1.8 billion to strengthen the Netherlands' flood protection infrastructure, reinforcing dikes and dunes to prevent sea and river water intrusion. This integrated approach not only addresses immediate environmental challenges but also promotes longterm resilience and efficiency in the housing sector, ensuring that homes are both energy-efficient and safeguarded against climate-related risks.