Market reprises FED expectations, moving global rates higher

FED cuts premature

The central theme of the fourth quarter is off course the rapid move in higher rates in the US and Europe. In this paragraph we will briefly discuss the US, as it impacted global rate markets, and therefore also the Dutch mortgage loan market. We can show that it is plausible that the rise in rates can be linked to the U.S. federal reserve and the first rate cut they made in the current cycle, which was in September. The cut of 50bp was premature, judging from the market reaction, as US Treasury yields moved quickly higher immediately after the FED meeting, see figure 1.   

The rate cut in September was followed by a string of higher US inflation prints, see figure 2. And to make matters worse for the FED, the labor market data in December was much better than expected, pushing rates even higher, see figure 1.

Lastly, economic growth in the 3rd quarter came out very solid at 3,1% annualized. Despite strong economic data, the FED continued its rate cutting cycle, by cutting rates again in October and December, or cumulative 1 percentage point since September. You might wonder, why is this relevant for European markets and mortgage rates in the Netherlands. As base rates increase, so must other rates sooner or later. The government spread difference between the US and German can’t increase indefinitely and as a result German government bonds (figure 1), euro swaps and mortgages rates followed suit. And this had and has its repercussions on Dutch mortgage rates. As expected, given the strong US economic data, the FED decided to pause in January by keeping their policy rate between 4.25 and 4.50%.

Curves closing in to normalization 

The ECB decided to cut their policy rate twice in the fourth quarter. And, that is not a surprise, this had an impact on the very front-end of the German bond yield curve and the euro swap curve, see figure 3. Positive is that we are closing in into the normal shape of the yield curve. Lastly, with the exception of the very front-end, the whole German government curve repriced as a result of a change in US central bank expectations, see the first paragraph.

Dutch inflation almost highest in Europe  

We are keeping a close eye on Dutch inflationary trends, as it remains persistently high. The latest reading from December was 3,9% YoY, compared to 2,5% of the Euro area, see figure 5. We have used HICP inflation for cross-country comparison reasons. To continue with figure 5, it is also clear, with the exception of Belgium, that the Netherlands has the highest inflation compared to most western European countries

You could see inflation as a hidden tax, and if it remains relatively high for a long time, it could have a negative impact on purchasing power or it could even bring households in financial distress. The latter is of course relevant for investors with exposure to Dutch mortgage loans. To see if the current high inflation is an issue, we should take a look at how real wages evolve. In figure 6 we have included both wage growth and real wage growth.

Wage growth is strong in the Netherlands with a 2024 average of 6,6%. Figure 6 makes also clear that from the fourth quarter of 2023 real wage growth is above zero, meaning that despite high inflation, wage growth transcends inflation. In other words, households purchasing power has increased, on average, since the fourth quarter of 2023. So financial distress is not a concern on average, and this conclusion is also confirmed by the persistent low level of non-performing mortgage loans, see figure 7. 

Why is Dutch inflation relatively high and sticky? 

There are a few of reasons why inflation is persistently high in the Netherlands, compared to the rest of Europe. Next to the strong wage growth in a services economy, another important factor is the rise in prices of housing. And to be frank, this can be attributed to government policy. For example, the previous government decided that, given high inflation, rent control should no longer be linked to inflation but to annual wage growth. But now we are in a situation where wage growth is higher than inflation. Meaning, this new rent control measure gives extra fuel for an extra increase in inflation. For example, for the middle priced segment, the maximum increase of rents is capped at 7,7% starting from the 1 of January 2025. In addition, the previous government also decided to substantially increase taxes for investors in residential real estate. For a large number of these investors it’s reason to sell these apartments, see Dutch Housing Market's Persistent Supply Challenge. These apartments will then most likely shift from the rental sector to the homeowner sector. This will further decrease the total availability of rental apartments, which in the end will drive up prices for tenants. A simple search on one of the main websites for rental properties (www.pararius.com), makes clear that there are currently 3! apartments available in the middle priced section (2) in Amsterdam. That is a sad reality. To conclude, it’s likely that inflation in the Netherlands remains elevated in 2025, even if the government decided to keep taxes unchanged. The housing sector remains an important contributor in that regard.