Some 10% of mortgages at risk of going underwater next year

With housing prices in the Netherlands expected to fall next year by an average of 2.5 percent, there is a higher chance that homeowners will hold mortgages that are more expensive than the value of the home. Figures released by the Dutch Central Bank (DNB) earlier this week showed that such a drop could affect up to 10 percent of homeowners with a mortgage, and many more will be affected should housing markets suffer a sharper fall.

Around 0.5 percent are already likely underwater now that prices have dropped for two straight months. That could rise to about 8 percent if prices drop by an average of 20 percent. Nearly 19 percent of mortgages would be underwater if housing prices dropped by 30 percent, DNB projections showed.

Of particular concern is that mortgage debt has been growing at exceedingly fast rates as housing prices have increased. Mortgage debt is now at a record high, totaling over 800 billion euros.

Housing prices have soared in recent years, setting record after record. Those tempted to buy now could be first affected by falling values. “I think this problem of being underwater can really only affect people who have very recently bought a house and have borrowed as much as possible," said Stefan Groot, housing market economist at RaboResearch, the sector and macroeconomic analysis arm of Rabobank. Groot pointed out to NOS that prices rose sharply for years, nearing up to 20 percent annual increases on average.

“So if you bought your house more than one or two years ago, house prices have to fall really sharply before you fall below the purchase price of that time,” he said. “It was different in the crisis from 2007/2008. Before that, house prices had risen by about 3 to 4 percent per year, so when prices started to fall, you quickly found yourself underwater.”

The DNB expects the Netherlands to see a correction in housing prices, with the country’s housing market being somewhat volatile with high peaks and deep valleys. If many mortgages do become underwater, that will have a wider impact on the country. Not only will it slow developments on the housing markets as fewer people will be inclined to move, it will also lead to a reduction in consumer spending as mortgage holders will likely try to pay more cash to bring down their debt as quickly as possible.

As such, the DNB cautioned about the possibility of banks facing a new acute crisis, and ordered financial institutions to extend their mandatory buffers and safeguards at least through 2024. “The starting position of the Dutch financial sector is strong, but its resilience is being put to the test again. Banks must prepare for an increase in loan losses and make adequate provisions for this in good time,” said Klaas Knot, the head of the DNB.

It took years to recover from the high number of underwater mortgages following the 2008-2013 credit crisis. Roughly 32 percent of mortgages held in 2015 still involved debt amounts that were higher than the value of the home.

After the economic crisis a decade ago, the Netherlands took steps to make it harder for homeowners to fall into problems. Before the credit crisis, buyers could take mortgages worth 120 percent of the sales price of the home to cover closing costs and renovations. That has been capped at 100 percent for almost five years, NOS noted.

Additionally, buyers can no longer get mortgages where they only pay the interest, and not the principal. Since 2013, buyers need to take a mortgage that will be paid off within 30 years if they want a tax deduction on the interest paid.