Dutch economic growth stagnates; Housing prices to fall 8.7% by 2025, says DNB

The Dutch economy will grow by 0.8 percent this year, significantly less than last year’s 4.5 percent, De Nederlandsche Bank (DNB) reported on Monday. Partly due to the lower economic growth, inflation will fall to 4.2 percent, which is still too high. The central bank predicted housing prices will drop by about 8.7 percent from the start of 2023 up to the end of 2024.

After this year’s stagnation, economic growth will increase slightly to 1.3 percent next year and 1.1 percent in 2025. After peaking at 11.6 percent last year, inflation will fall to 4.2 percent this year, 3.7 percent next year, and 2.5 percent in 2025.

According to the DNB, core inflation, which excludes the outside influences of energy and food prices, is proving even more stubborn than expected and is now higher than headline inflation. This year, core inflation in the Netherlands will be 6.8 percent, dropping to 3.6 percent next year and 2.8 percent in 2025.

The DNB called that very worrying because it indicates that the Netherlands’ inflation could still be high after the Europan Central Bank (ECB) achieved its target of reducing inflation to 2 percent in the eurozone. “If inflation in the eurozone falls but remains relatively high in the Netherlands, lowering inflation in the Netherlands will become even more difficult,” the DNB said. The ECB focuses on the entire eurozone and can’t take Netherlands’ specific measures.

The DNB, therefore, appealed to employers and trade unions to be more restrained in their wage- and price increases. “To prevent the economic adjustment process from leading to a leapfrog dynamic that further exacerbates inflation, it is important that companies and trade unions achieve controlled growth in profits and wages,” the Dutch central bank reiterated.

The government also needs to show more discipline in its budgeting, the DNB said. Government finances will deteriorate in the coming years. “Although the government debt remains well below the EU standard of 60 percent at 50 percent, the budget deficit, at 2.2 percent this year and 2.7 percent in the coming years, is close to the 3 percent limit,” the central bank said.

“Taking into account the state of the economy, the budget deficit is too high. With this loose budgetary policy, the government is contributing to overheating of the economy, which makes combating inflation more difficult.”

Despite the cooling economy, the actual production (GDP) “remains slightly higher than what can be efficiently sustained over a longer period of time,” the central bank said. Unemployment will rise slightly but will remain historically low at well below 4 percent. As a result, the labor market will remain very tight.

Housing prices will continue to fall for now

The Dutch central bank reaffirmed that rising interest rates, a common tool to fight inflation by central banks globally, has a negative impact not only on corporate investments, but also on real estate markets. The European Central Bank is among the institutions that have repeatedly hiked interest rates to get a handle on the high levels of inflation.

Housing prices in the Netherlands will fall by 5.1 percent over the course of 2023. They will decline another 3.8 percent on average nationally next year, the DNB predicted. “It is expected that house prices will eventually fall by about 10% in 2025 compared to the peak in the summer of 2022.” The losses should be short-lived, as “a small increase will follow in 2025.”

In the Netherlands, mortgage rates have gone up from a low point of 1.64 percent in February 2022 to an average of about 3.9 percent in April 2023. The rising rates mean prospective buyers are not able to borrow as much for a mortgage, while the questionable economy and future uncertainty make it less likely for some people to make long-term purchases.

Home prices in the Netherlands started to fall around the third quarter of 2022. From January through December of that year, prices were still 13.6 percent higher on average than at the end of 2021. In December 2022, home sales prices were 90 percent higher compared to June 2013, the low point during the previous economic crisis.

This year, existing homes in Amsterdam, Rotterdam, The Hague, and Utrecht were sold for an average of 480,000 euros in the first quarter of this year, down 8.2 percent compared to the first three months of 2022. Outside those cities, sales prices have dropped by about 0.8 percent, Kadaster said last month.