Swaps rallied in the third quarter, together with Dutch and German government bonds, see for example the 7-year swap rate time series in figure 1. But the rally in swaps e.g. in the 7 year sector, was more pronounced and as a result swap spreads tightened vs government bonds. At the start of October, there was a sell-off in governments bonds, this let to a further tightening in swaps spreads.
Figure 1: 7 years swaps
Mortgage rates also declined, but given the delayed response in mortgage rates, mortgage spreads increased versus swaps in the third quarter. To visualize, we have included 10 and 20 year NHG spreads, and non-NHG spreads for the same maturities in figure 2 and 3.
With respect to NHG spreads, as swaps rallied, the 10 year mortgage spread is back above 100bp from around 80 during the summer months. The same holds for the 20 year sector, which is currently above 125bp.
Figure 2: NHG spreads
To make comparison over time easier, we have added average spreads for both maturities in the figures 2 and 3. Judging from figure 2, it looks like that there is a minimum spreads level of 75bp for 10-year NHG, with a brief exception in 2022, due to the rapid rise of swaps.
For 10-year non-NHG that minimum spread level is around 125bp, see figure 3.
The 10-year Non-NHG spread widened 25bp since July to currently 150bp and the 20 year non-NHG spread is currently above 160bp.
Figure 3: Non NHG spreads
Average fixed rate period remains at a low level, despite lower mortgage rates
As interest rates have risen since 2022, the preferences of consumers and brokers with respect to the fixed interest rate period has shifted significantly too. Figure 4 shows the market share of each maturity bucket on a quarterly basis. In response to the rapid increase in mortgage rates at the beginning of 2022, consumers opted for a much shorter fixed rate period. That explains the complete turnaround in market share of the maturity buckets.
Figure 4: Market share per matruity bucket ex loan porting
For example, in 2020 the market share of the 11-20 year maturity bucket was 60% and less than 25% for the 6-10 year maturity bucket. In addition, sub 5 year sector was hardly existent. Starting in 2022 and beyond, this completely reversed. In the third quarter of 2024 the market share of the sub 10 year maturity bucket was 80% versus 15% for the 11-20 year sector and around 5% for 21-30 year sector. This shift in fixed rate preference can also be visualized in terms of the average fixed interest period of new mortgage loan applications. Figure 5 below illustrates the significant shift from 20 years in 2022 to 11 years in 2024. The current average fixed rate period of around 11 years, hasn’t been this low since 2016.
Figure 5: Average fixed interest period new mortgage applications
What will consumers do in the next few years?
Since the top in mortgage rates in at the end of 2023, see the dark and light blue timeseries in figure 6, rates have moved 100bp lower. Despite this significant move, consumers haven’t opted for longer maturities. For example, as is clear from figure 4, the market shares of all maturity buckets remained more or less unchanged in 2024. To visualize the relation between mortgage rates and the average fixed interest period of new mortgage loan applications, we combined the two variables in figure 3.
Do take note of the reverse order of the average fixed interest period of new mortgage loan applications on axis on the right hand side.
Figure 6: Mortgage rates vs average fixed interest period new mortgage applications
The inverse relation and good fit is clear in figure 6. But, as mentioned early, despite the drop in mortgage rates, the average fixed rate period has not moved up yet in recent months. Given the ECB trajectory to lower policy rates, further curve normalization and lower rates across the curve are expected. But what will consumers do and also when? Although it’s hard to predict when consumers will respond, it’s a near certainty, provided continuation of the downward trajectory of interest rates, that consumers will opt for longer maturities. The only remaining question is when. For bank investors this is something to take into consideration.
We expect a decrease in the market share of NHG mortgages in 2025
NHG recently announced that two important changes are planned for 2025. First, the NHG limit, that is the maximum value of a home that can be financed with the backing of NHG, will increase to €450,000 from €435,000. The maximum home value including new measures to make the home more energy efficient, will be increased to €477,000 from €461,100.
Secondly, the levy that is charged to homebuyers to use the NHG protection will be decreased by 20bp, to 0.40%. To learn more about this levy, we would like to refer to the following article that we wrote earlier: Dutch National Mortgage Guarantee Scheme - A Primer for Investors. Although the difference in purchasing costs of a house at the maximum NHG limit is only €900, it can make a big difference for the average home buyer in the NHG segment.
Different from last year, is that the current average home price of €473,000 (Q3 2024) is higher than the NHG limit that will be valid from the first of January 2025. In comparison, the average house price in the third quarter of 2023 was €422,000 vs a NHG limit of €435,000 starting from the first of January of 2024. This means that, right from the start of 2025, the pool of eligible houses for the NHG market is a lot smaller than at the start of 2024. For that reason we expect an overall decline of NHG market share in 2025 compared to 2024. As housing prices will very likely continue to increase in 2025, the pool of eligible houses will shrink even more. In figure 4 below, we have included the NHG market share over time and currently its above 30%. To be complete, the market share of the NHG market also depends how the relative size of the non-NHG market evolves.
Figure 7: NHG marketshare of total mortgage applications
The graphs shows also that with every turn of the year there is local maximum visible which can be attributed to the increase of the NHG limit right at the start of the new year. With the exception of 2022, the market share gradually levels of during the year. The latter is related, as mentioned above, that the pool of eligible houses decreases as result of the increase in housing prices.
Arrears have increased mariginally
In some European country arrears can be a tricky subject, but not in the Netherlands given the extremely low percentage of arrears in the residential housing market. So we do have to put things in perspective. But, during 2024 we do see a small uptick in arrears. For example for the arrears at the end of the month in figure 6 below, at the start of 2023 the percentage of arrears was around 0,25%, currently that’s around 0,35%. Still extremely small, but it’s worth noting. From the inflow of arrears there is nothing we conclude yet, despite the increase in 2024. In 2017, 2018 and 2019 similar spikes were visible, but the statistic moved back to the average in the months that followed. It’s normal to see in increase in arrears after the summer, so we need more data to draw further conclusions. If we look at daily mortgage arrears as a percentage of the portfolio in figure 7, we can see an improvement in the month of October. The peak value in the middle of the month is lower, and the arrears percentage at the end of the month is also improving. Therefore, the data for the month of October looks promising, but more data is required to see if arrears move back to longer term averages.
Figure 8: Percentage of mortgages in arrears
Figure 9: Number of daily arrears as of portfolios
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This article is the third chapter of our quarterly market update for Q3 2024. In this report, we outline developments in the Dutch economy, the housing market and the mortgage market.