Netherlands: Lower house prices more likely as interest rates rise | Article

A further rise in interest rates increases the chances of a fall in house prices

A faster-than-expected rise in mortgage interest rates makes a decline in house prices more realistic, as the negative effects of higher interest rates on the affordability and borrowing capacity of people wishing to buy a home are expected to increase.

The two examples below illustrate the effect of an additional one percentage point increase in mortgage interest rates on monthly mortgage spending and borrowing capacity.

1. Higher mortgage costs due to 1% interest rate hike

Assuming a mortgage of €429,000 (the average price of a home in April), raising interest rates by one percentage point would increase net monthly outlays by around €115*. Mortgage costs remain the same with a mortgage of €395,000. This is about 7.5% less than the current average house price. In addition to the direct effect of higher interest rates on total monthly expenses, there is another negative effect on homeowners. As interest charges increase, the amount they pay each month on their mortgage actually decreases in the early years of the term. With higher interest rates, homeowners accumulate home equity or other wealth more slowly. At the current interest rate and with a mortgage annuity of €429,000, the monthly repayment in the first year is approximately €705. At a one percentage point higher interest rate, this amount decreases by about $105 per month to $600.

2. A lower maximum borrowing capacity as well

Higher interest rates also reduce the maximum borrowing capacity of households. To take out a mortgage annuity of €429,000, a single person would need a gross annual income of around €84,000 at the start of this year, based on NIBUD* lending standards. A further increase in mortgage interest rates by one percentage point would mean that the same single employee could borrow around €20,000 less. Without equity, this translates directly into a drop in the price at which this person who aims to buy a house can bid.

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