Dutch economic growth stalls over Ukraine war; Housing prices to jump 14% this year

The growth of the Dutch economy will probably come to a standstill this year due to the war in Ukraine and the sharp rise in inflation. And it may not stop there. In a dark scenario, the Netherlands could face an economic contraction next year, said De Nederlandsche Bank (DNB) in a new economic estimate. The DNB also warned that house prices in the country would continue to rise, by 14 percent this year.

According to the central bank’s chief economist Olaf Sleijpen, the conflict in Ukraine is causing companies and especially households to be reticent about spending. In addition, international transport flows are affected, and life has become considerably more expensive in many areas. Energy prices, in particular, have risen sharply. As a result, some households are severely affected financially, especially in the lower-income groups.

The accountants at DNB think that the economy as a whole could still grow by 2.8 percent this year. That seems like a lot, but in fact, that percentage is mainly due to the rapid and strong recovery from last year, which is reflected in the figures. Economists call this a spillover effect. In practice, experts only foresee some real growth for the last quarter of this year.

From the end of 2022, the economy could pick up again, with a growth of 1.5 percent next year and 1.7 percent in 2024. At least if you use DNB’s base estimate. That includes an inflation rate of 8.7 percent for this year, which will gradually decrease again after that.

Due to the great uncertainty about the course of the war, DNB also calculated two alternative scenarios. In the less bad of the two, energy prices and uncertainty will remain elevated for longer, with more pressure on global trade. Then the economy could contract by 0.4 percent next year. The darker scenario considers that Russia will abruptly stop its energy supply to Europe, leading to production failures for companies. Then the economy will grow by 0.4 percent this year, followed by a 1.5 percent shrink next year.

Home seekers also shouldn’t hold their breaths waiting for house prices to fall, according to DNB. While the rising mortgage rates will cool down the housing market, prices will only increase less strongly than before, not fall.

“There are simply too few houses. That is not going away,” said Sleijpen. When housing prices fell sharply years ago, that was because of the financial crisis, and today's situation can not be compared with that.

DNB expects houses to cost 14 percent more this year than last year, on average. House prices have already risen sharply over the past months. Even if there were no further increases the rest of the year, house prices would still come out 12 percent higher than last year. For next year and the year after, DNB expects prices to increase “moderately” - by almost 4 and 2.5 percent, respectively.

Many banks and lenders have already raised mortgage prices in recent months in anticipation of the rate hike announced by the European Central Bank (ECB) last week. Sleijpen expects this trend of rising interest rates to continue for the foreseeable future. The amount people can borrow to buy a house will therefore come under pressure, so prices won’t rise as quickly as before.

DNB expects the average interest rate on new mortgages to rise from 1.7 percent last year to 3.8 percent in 2024. However, it should be noted that this figure responds with a delay to the rates that mortgage lenders publish themselves. The rate for a National Mortgage Guarantee mortgage with a fixed-rate period of 20 years, for example, was already over 3 percent last month, DNB pointed out.