Will many homes be “underwater” again now that home prices are falling?

• Leanne Kraniotis

  economics editor

Now housing prices the valley Homeowners may fear that more homes will soon be “underwater” again, as happened in the credit crunch between 2008 and 2013.

A home is underwater if the outstanding mortgage amount is greater than the home’s value. When the house is sold, a residual debt remains.

If many homes are underwater, it hinders the flow of the housing market. Owners are not inclined to buy another home if they know in advance that they will be left with a debt. But sometimes people have to sell their house, for example in case of divorce or unemployment.

Families with their own homes underwater are also reducing their expenses. Because those homeowners are more inclined to save money or make extra repayments on their mortgage to improve their “underwater situation”.

At the height of the credit crisis, 1.4 million homes were under water. Since then, that number has dropped significantly:

In recent years, all kinds of measures have been taken to prevent the value of homes from falling below the amount of the existing mortgage.

For example, the so-called top mortgages may no longer be disbursed. Before the credit crunch, a potential buyer could get a mortgage equal to 120 percent of the expected home value. This also included the buyer’s costs and often extra money for, say, a renovation.

Since then, this has been gradually reduced and as of 2018 it is still possible to borrow up to 100 percent of the home’s value. As a result, a situation is now much less likely where the mortgage is higher than the home’s value.

There was also another important measure. Because before 2011, the interest-only mortgage was widespread. This is a mortgage where there is no repayment, but the homeowner only pays interest. So the debt remains the same.

As of 2011, only half of the mortgage amount could be borrowed without interest. And since 2013, homebuyers have to do it. if they still want to get the mortgage interest deduction, choose a mortgage that will be fully repaid in 30 years.

The mortgages are therefore less high than the value of the home these days. And because of the automatic repayment, the mortgage is lower every year. As a result, fewer homes are now flooded with falling home prices.

This is also apparent from the calculations of the De Nederlandsche Bank. Because when house prices dropped about 20 percent in 2013 from their peak, no less than 33 percent of all owner-occupied homes in the Netherlands were underwater.

But if house prices now drop by 20%, only 7.5% will be flooded:

“I think this problem of being underwater may only really affect people who have recently bought a home and borrowed as much as possible,” says Stefan Groot, real estate economist at RaboResearch.

Also because for several years house prices have risen dramatically, up to 20 percent on an annual basis. “So if you bought your home more than a year or two ago, house prices have to drop very drastically before they drop below the purchase price of that period,” says Groot.

“It was different in the 2007/2008 crisis. Before that, house prices had risen by about 3-4% a year, so when prices started to go down, you were immediately under water,” says Groot. .

Then there is also the National Mortgage Guarantee, which can help people with residual debt. Because this guarantee guarantees that, if a house has to be forcibly sold due to, for example, unemployment or divorce, the seller will not have any residual debt left.

NHG then pays the remaining debt to the mortgage lender. In practice, this has been rare in recent years, due to the sharp rise in house prices.

There are about a million homes with an NHG mortgage. These are the cheapest houses, because the NHG can get a buyer with a mortgage of up to 355,000 euros. This week it was announced that the cap will be € 405,000 next year.

At the peak of 2014, some 4300 homeowners had yet to be “rescued” by NHG, last year there were only 32:

In the first nine months of this year, NHG only had to help someone with residual debt six times. This number could obviously rise again if the current decline in house prices continues.

But the NHG also wants to focus more on preventing residual debt in the coming period. “A forced sale is the last thing we want,” a spokesperson said. “We will try to intervene first, together with the mortgage lenders, if someone has payment problems, for example by granting a suspension of payment or restructuring the loan.”