DNB: Risk that households will not be able to meet mortgage obligations is increasing

Peaking inflation, rising interest rates, an increasing risk of a recession, declining confidence due to the war in Ukraine, falling house prices: economic times are anything but calm. The risks to financial stability are increasing, according to the six-monthly risk analysis published by De Nederlandsche Bank on Monday . There is now no question of an acute risk of a financial crisis, such as the one that broke out in 2008. Nevertheless, DNB is taking a precautionary measure. Due to the ‘continuing systemic risks in the housing market’, the regulator is extending a measure to prevent banks from getting into trouble because households can no longer afford their mortgage payments. Banks assign a certain risk to mortgages in order to determine how much capital they hold. At the end of last year, DNB ruled that the weighting of that risk was too low in some cases. That is why the regulator set a lower limit as of 1 January. This lower limit has now been extended until ‘at least’ 1 December 2024. The ‘systemic risk’ in the housing market identified by DNB relates to the increased financial pressure on homeowners. They are burdened by the very high inflation in their daily lives. Homeowners whose fixed-rate period ends will also have to deal with suddenly higher monthly payments due to the recent sharp rise in mortgage rates. This increases the risk that households will not be able to continue to meet their mortgage obligations. The resilience of the Dutch financial sector is being tested DNB president Klaas Knot said in a conversation with journalists that he had “no other choice” than to intervene longer in the risk management of banks. For years, Knot has argued unsuccessfully with successive cabinets for stricter borrowing standards and for further curtailment of mortgage interest deductions. Such measures would limit the mortgage risks for banks, but for the time being are not forthcoming, because politicians do not want to burn their fingers. The lending standards in the Netherlands are relatively flexible. Home buyers are allowed to borrow up to 100 percent of the value of their home (in the past, that was even more). In most other countries you have to put in your own money. Households in the Netherlands are also allowed to borrow a lot in relation to their income. Young home buyers in particular have high debts relative to their incomes. About 60 percent of households under the age of 36 and 45 percent of older households have a debt of more than 4.5 times their income. “It is unimaginable abroad,” said Knot. Houses under water? With a further fall in house prices in the Netherlands – a trend that started last quarter – DNB does not think that mortgages will become ‘underwater’ en masse (the house value will then be lower than the mortgage). In the period 2009-2013, when house prices plummeted in the wake of the credit crisis, this happened to a third of mortgages. In the meantime a lot has changed. Since then, Dutch homeowners have made more voluntary and compulsory repayments on their mortgages (the latter has been a condition for mortgage interest deduction since 2013). House prices have also risen so sharply in recent years that the fall would have to be very strong to lower house values below those of mortgages. If house prices fall by 20 percent, 8 percent of homeowners would be flooded, DNB calculated. In such a scenario, 13 percent of homeowners will find it tight: the mortgage would be more than 90 percent of the home value. Also read: Biggest drop in house prices ever: ‘This is really a big bang’ The regulator does see a risk that a possible recession in the Netherlands will be more severe than in neighboring countries, because of the ‘correction’ in the housing market, which may also be stronger than elsewhere in Europe. The Dutch housing market is considered to be quite volatile, partly due to the flexible lending standards. “High peaks, deep valleys,” said Knot. In 2009-2013, the Netherlands went through a double recession, which was more severe than in neighboring countries. The housing market crash played an important role in this: consumer confidence evaporated. capital buffers In view of the current deteriorating economic conditions, it is important that banks’ capital buffers remain at the required level, DNB believes. “Although the starting position of the Dutch financial sector is strong, 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,” DNB warns. In addition to the mandatory measure on the risk weighting of mortgages, the regulator also urges bank executives to exercise restraint in paying out dividends and repurchasing own shares, because this is at the expense of their own buffers. During the corona crisis, there was a ban on the payment of dividend, now there will be no (for the time being). “Ultimately, the financial sector is a commercial sector. If you become too instructive as a supervisor, you will take the place of entrepreneurs,” says Knot. DNB’s caution also includes the fact that banks are expected to be “quite profitable” in 2022, Knot said. He noted, however, that it would be a ‘quite disappointment’ for DNB if the capital ratios of Dutch banks were lower at the end of this year than at the beginning of this year. A version of this article also appeared in the newspaper of October 11, 2022