Don't pin your hopes on house prices continuing to fall, IMF warns Dutch buyers

Due to the sharply falling house prices in the Netherlands, there is a risk that people will adjust their expectations accordingly and automatically assume that house prices will continue to fall in the future. Dutch board member Paul Hilbers of the International Monetary Fund (IMF) warned against this in conversation with the ANP.

“Economists call this adaptive expectations. That people expect house prices to fall purely because homes have fallen in price recently,” he said. According to Hilbers, it is dangerous to base decisions like buying a house on such expectations. A self-reinforcing effect could occur in which house prices fall further because people think they are going to fall.

The IMF board member urged regulators to keep a close eye on the situation in the housing market. But he is “not overly concerned” about the fact that homes have become cheaper recently, partly because households currently don’t seem at risk of ending up with “underwater” mortgages en masse.

The Duch Association of Real Estate Agents (NVM) recently reported a decrease of 8.2 percent in house prices. A “solid figure,” according to Hilbers. “But on the other hand, the cooling is not dramatic.” He stressed that house prices rose “very fast” until the middle of last year.

The rising mortgage interest rates is the main reason the housing market has turned around relatively quickly. "That effect will eventually fade out again when the interest rates stop rising," said the IMF board member. Hilbers would not venture to make any concrete predictions about housing prices, but he does think that the decline will come to an end at some point. He emphasized that there is still a housing shortage in the Netherlands. "That tightness on the supply side will put the brakes on the fall in prices at some point."

The IMF previously argued that the Netherlands would be wise to further limit its generous lending standards for homebuyers. According to Hilbers, that advice will remain in principle to make households less vulnerable to financial issues. At the same time, it would not be wise to intervene this way right now, he added. Restricting borrowing standards can dampen demand for homes, and fewer and fewer homes have been changing hands recently. "That is now an impulse in the wrong direction. It is better to limit lending standards when the market picks up again."

Keep rising interest rates to fight inflation

Central banks should continue to raise interest rates for as long as necessary to fight inflation, Hilbers also said. In doing so, they should not allow themselves to be unnecessarily influenced by the recent unrest in the banking sector, for which other instruments can be used. He did acknowledge that it is currently a "complicated time" for central banks.

They are in the process of raising interest rates sharply to halt the staggering level of inflation seen over the past year. The idea is that borrowing will then become more expensive, which should slow down demand in the economy, and thus the "too high inflation" which has remained.

But because interest rates are rising so quickly, financial institutions can face problems, explained Hilbers. The latter happened recently when two banks collapsed in the United States. In addition, the Swiss financial institution Credit Suisse wound up in trouble, and that large bank had to be rescued to prevent financial stability from being endangered.

Due to this unrest, some analysts said last month that the European Central Bank (ECB) might pause and wait a while before implementing further interest rate hikes, but the ECB raised interest rates anyway. However, the ECB policymakers in Frankfurt did not immediately issue a new forecast about the amount of a possible next interest rate hike, something they had done with the previous interest rate decision.

Hilbers noted that central banks must ensure monetary and financial stability. He said it is a misconception that policymakers have to choose between the two forms of stability. "Interest rates are the most important instrument for inflation. But central banks can also use other instruments for financial stability."

This can include setting up stress tests so that banks are as well prepared as possible for possible financial shocks. According to Hilbers, the authorities can also provide emergency financing if banks do run into problems. He emphasizes that such a mechanism was set up in Europe after the previous crisis for just that reason.

The IMF board member is therefore not currently afraid of a new banking crisis like in 2008. The cause of the financial problems was different at the time, he said. "That was about problems with mortgages in the United States. We aren’t seeing that now." According to Hilbers, the financial sector has also become far more resilient since then due to the introduction of stricter requirements, certainly in Europe.