Interview with Ruben van Leeuwen Rabobank

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“The real problem is a lack of supply”

Ruben van LeeuwenAn interview with Ruben van Leeuwen, Senior ABS Analyst at Rabobank, about the consequences of the Dutch housing bubble for investors. 

“What is your main concern for the Dutch mortgage market?”

We’re currently still observing an ongoing recovery of the Dutch housing market, and given the strong economic backdrop and low interest rate environment, the upside risks to the market are currently bigger than the downside risks, at least in the short term. Over the longer term, the economic outlook of the Netherlands is more questionable, as trade policies around the globe could become more protectionistic, and the future of the EU and the Eurozone is at stake on the back of rising populism and Euroscepticism. On top of that, we also have Brexit. All these factors could affect the open Dutch economy, and subsequently also the Dutch housing and mortgage market. Credit fundamentals are strong, however, and due to stricter underwriting criteria, they have even improved further in recent years.

Probably the main concern for the mortgage market is the uneven pace of recovery of the housing market across regions. More urbanised areas, especially around Amsterdam, but also in the ‘Randstad’ at large, see currently strong housing demand. Peripheral regions are clearly lagging behind. Although this development is not new, it seems that regional differences are getting more marked, despite the fact that the Netherlands is a small country. For the mortgage market, we note that virtually all originators operate on a national level currently. But as credit fundamentals on the collateral are now more diverging, you could question whether this will remain the case.

“What are the biggest challenges the Dutch mortgage market faces in 2017?”

We note there is a possibility that interest rates could rise, even this is not our house view. Nonetheless, we think that higher interest rates could reveal the real competition in the mortgage market. In recent years, we have seen quite some new entrants to the market, which are all aiming to get some market share in new mortgage production. Interestingly, this increased competition has not resulted in yet in a major compression of loan margins. We argue that one of the reasons for this the fact that risk-free interest rates have continued to decline as well, i.e. more aggressive pricing policies of originators were often quickly compensated by falling swap rates. If this is going to change, and recently we already have seen a reversal in swap rates, more aggressive pricing to gain market share will be at the expense of the loan margin.

The other challenge could potentially be banking regulation. In particular to so-called ‘Basel IV’ debate could affect the holdings and presence of the Dutch banks in the mortgage market. Although the potential effects are mostly for the long-run, anticipation to stricter capital requirements could already induce a gradual shift out of banks from the market. Although nothing has been decided yet by the regulators, it remains interesting to see if a possible forthcoming supply vacuum will be compensated by more active originators. We note most Dutch insurers are already heavily exposed to mortgages and have limited room to grow, so we’re focusing on capacities of pension funds and foreign originators. If these latter two won’t be willing or able to increase loan production if banks retreat, higher mortgage rates might be required to re-establish an equilibrium on the market.

“Why would you invest in Dutch mortgages?”

They offer an attractive trade-off between yield and risk. Margins are relatively high, whilst the credit risk is low. This latter fact has been well proven by the recent crisis on the Dutch housing market, as loss rates have remained extremely limited.

“What does the housing bubble in Amsterdam and Utrecht mean for investors”

Although house prices are increasingly rapidly in these two cities, we won’t classify it as a bubble, at least, not yet. Indeed, demand for housing is high, but the real problem is a lack of supply. There are simply not enough homes available in these popular to cater for the strong demand. New construction are in our view the only solutions, but this is clearly the lagging factor in both cities. Nonetheless, the low rates environment is partly responsible for this strong demand, as it still makes housing relatively affordable. From this perspective, a rapid reversal of interest rates might pose a threat, even though this is unlikely to take place without a rise in income growth. Moreover, it is important to stress the low rates environment has not resulted in a higher degree of leverage on the market, mainly because strict underwriting criteria restrict what people can borrow on the basis of their income. All in all, the speculative element, which is in our view a key criterion to classify a financial development as a bubble, is largely missing in our view. Instead, the rapid house price appreciation in Amsterdam and Utrecht is mostly the result of an increasingly limited supply.

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