We expect Dutch BTL originations to take off again in the coming months following downward pressure over 2023 and 2024. Interest rates are going down, fostering refinancing activity and increasing mortgage affordability. The BTL RMBS transactions that we rate have performed well amid rate hikes, housing market turmoil, and tighter regulations. We anticipate that product innovation will contribute to the recovery, in a market where rental demand remains high and housing supply low.

In 2023, Dutch housing prices dropped as a result of lower demand, before picking up again in 2024. Prices of Dutch BTL residential homes in commercial transactions slowed down in 2023 and 2024, but did not decrease, year over year. Structural market tightness in the Netherlands reflects high rental demand driven by population growth, an increase in the number of single-person households, and low housing supply. There is a housing gap of 401,000 homes, according to ABF Research. The new Dutch government recently announced plans to build 100,000 new homes per year to tackle the housing crisis.

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A Vicious Cycle? Regulations And Rate Hikes

To protect tenants against rising rents, the Dutch government has gradually imposed rent caps, based on a house value system (WWS). The Affordable Rent Act came into effect on July 1, 2024, and extended rent limits to homes in the mid-market rental sector. About 90% of rentals in the Netherlands are now regulated.

Tenants benefit from better protection and can request a rent review from a rent committee, the decisions of which are binding. Although the amount of rent is capped, landlords can increase it once a year. Until May 2029, annual rent increases are regulated by law. Each year the government sets the maximum rent increase for the private rental sector, which is the lower of inflation plus 1% or wage development plus 1%. The maximum rent increase in 2024 is 5.5%.

The WWS has also been revised to take into account the property's energy performance certificates, with reduced rents for low-energy efficient homes (see "Building Energy Regulations And The Potential Impact On European RMBS", published on Sept. 6, 2023).

In addition, from Jan. 1, 2025, municipalities will be able to fine landlords if they set excessive rents.

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In 2022, municipalities were allowed to prevent investors from purchasing homes in regions with tight housing supply. Several big cities including Amsterdam, Utrecht, Rotterdam, and The Hague have implemented the ban. A study from the University of Amsterdam and Erasmus University showed that while the policy has had little effect on property prices in Rotterdam, it did however reduce rental supply, resulting in rents increasing by approximately 4%.

Higher interest rates, rent caps, and high property transfer tax have reduced BTL profitability, and fewer investors are able to pass lenders' affordability criteria. The Dutch BTL market has been caught in a vicious cycle: rate hikes and regulatory constraints have forced many landlords to exit the market, and disincentivized property developers from adding new residential supply to the market. Both of these factors have combined to reduce rental supply. Slowing supply against a backdrop of strong demand means that what rental supply remains is highly sought after.

However, there are signs that the mood among policymakers may be softening. To limit the owner-occupancy housing shortage, the former Dutch government raised the property transfer tax for second-home owners to 8% from 6% in 2021, and then again to 10.4% in January 2023. The current government has proposed lowering the rate back to 8%, effective Jan. 1, 2026.

Origination Volumes Bounce Back, Credit Performance Remains Strong

From the first half of 2022, interest rates on new mortgages granted by Dutch banks to households started to climb sharply. This threatened to reduce house prices and affect credit performance. The European Central Bank (ECB) revised its main refinancing operations rate up to 4.50% in September 2023, before lowering it to 4.25% in June 2024, 3.65% in September 2024, and 3.40% in October 2024.

At the same time, the Dutch government implemented further regulations to tackle the under supply of housing. The credit performance of the Dutch BTL RMBS transactions that we rate has withstood these economic headwinds so far. Origination volumes are up compared to 2023 levels, and we expect them to rise further as rates go down and lenders adapt their product offerings.

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As a result of rate hikes and tighter regulations, BTL purchases dropped by 49% and sales by 24% in 2023 compared to 2022. Rental properties tend to shift to the owner-occupancy market, where they were mostly bought by first-time buyers.

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The performance of the Dutch BTL RMBS transactions that we rate has been good since 2022, with relatively low arrears. Our Dutch BTL total arrears index increased slightly in June 2024 to 0.78%, but this remains low compared to its level during the COVID-19 crisis. Our Dutch BTL index is on the low range compared to other markets.

For severe delinquencies above 90 days, our Dutch BTL index is also low at 0.24%. Defaults and repossessions are few and far between, with no net losses recorded in any of the transactions that we rate. We have not lowered any of the ratings on the transactions we rate during our surveillance process.

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Performance has been good primarily because most loans have fixed rates in the medium term, which temporarily protects borrowers from rising interest rates. Lenders generally offer fixed rates for one to 10 years. For the transactions that we rate, most loans have a reset interval of five to seven years (see "A Primer On The Dutch RMBS Market", published on June 3, 2024).

After the fixed-rate period, loans either switch to a floating rate or to a renegotiated fixed rate for several years. The current weighted-average coupon in the portfolios under our surveillance is 3.9%, as opposed to various non-bank lenders' current rates in the range of 5.00%-7.00% (for interest-only BTL mortgage loans).

Prudent underwriting criteria have also supported transactions' good performance. Maximum loan-to-value (LTV) ratios generally do not exceed 80% for most lenders. The average current LTV ratio across all Dutch RMBS portfolios under our surveillance is 64.4%. Management of delinquent loans is generally very active, with servicers proactively reaching out to borrowers to find amicable solutions.

In addition, we expect the Dutch unemployment rate in 2024 to be 3.7%, among the lowest in Europe (see "Economic Outlook Eurozone Q4 2024: Consumer Spending To The Rescue", published on Sept. 24, 2024). Vacancy rates remain low because of market tightness, therefore limiting reductions in income generated by rental properties.

Non-Call Risk Is Moderating But Still Remains

Concerns regarding credit deterioration appear to be contained. However, falling origination volumes and tightening rent controls pose an existential question to BTL lenders, many of whom are non-bank institutions. Negative growth and a fixed cost base cast doubt over how much incentive lenders will have to honor call options. While there can be no guarantee that calls will be made, we believe non-call risk is moderating.

It is reasonable to assume that, for transactions that amortize sequentially, the notes' weighted-average margin will increase over time, given the deleveraging effect of the most senior class of notes. However, this is not necessarily the case for the Dutch RMBS transactions we rate. Except for older transactions or those with no excess spread note, we observe that high-margin excess spread notes are often repaid within two or three years after closing, resulting in slightly lower weighted-average current margins than at closing.

The weighted-average step-up margin is on average 1.62x higher than the current weighted-average margin (1.72% vs 1.07%), which incentivizes issuers to refinance transactions before the step-up date.

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Prepayments fell significantly in 2023 amid rising interest rates and increased again in 2024, although at much lower levels than before 2023. The average prepayment rate across all the Dutch RMBS BTL portfolios in June 2024 was 10.1%. Prepayment rates have reached historical highs in some portfolios, and while this has led to accelerated amortization of senior notes, the weighted-average note margin has not varied much. This is because the most senior class represents a relatively high share in the total class size at closing--83% on average.

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In 2024, even in the context of low BTL mortgage originations, we have seen issuers call existing transactions and refinance, with the issuance of Domi 2024, Jubilee Place 6, and Dutch Mortgage Finance 2024. Some of the issuers involved in those transactions had originated enough loans to securitize. However, one issuer had to acquire an additional portfolio of loans to compensate for the lack of new business.

Our expectation is that BTL loan originations should take off again in the coming months. This is primarily because of interest rates going down, which will foster refinancing activity and increase mortgage affordability. Although regulatory constraints weigh on profitability, there is still a structural high demand for renting a property, and investors are likely to select homes in areas with the highest rents and take advantage of further housing price increases while the housing shortage continues.

Furthermore, we see that lenders have started to adapt to the new regulations with more innovative products, with increasing focus on specific segments such as mixed-use properties and multi-tenanted residential houses. These products should attract customers in search of higher profitability, given that they generate higher yields than standard BTL properties.

Owners of mixed-use properties benefit from income streams from both residential and commercial units, which enables diversification and reduces exposure to regulations on the residential market.

Non-bank lenders have also increased their risk appetite, proposing loans and properties of larger amounts, with up to 85% LTV ratio. These more flexible lending criteria will enable them to extend their customer base and attract borrowers that previously could not pass affordability assessments or were looking to acquire high-value properties.

We believe that these factors altogether should fuel BTL originations in the coming months, and ultimately reduce non-call risk. That said, such an evolution would mean that Dutch BTL transactions become less homogenous.

Related Research

• EMEA Structured Finance Chart Book: October 2024, Oct. 16, 2024
• Economic Outlook Eurozone Q4 2024: Consumer Spending To The Rescue, Sept. 24, 2024
• European RMBS Index Report Q2 2024, Aug. 16, 2024
• European Housing Markets: Better Days Ahead, July 17, 2024
• A Primer On The Dutch RMBS Market, June 3, 2024
• The Netherlands' New Government Coalition Will Likely Retain Fiscal Prudence, Despite Plans To Expand Spending, May 22, 2024
• The Netherlands, April 22, 2024
• Building Energy Regulations And The Potential Impact On European RMBS, Sept. 6, 2023
• Dutch Buy-To-Let: Down But Not Out, April 19, 2023
• Dutch Buy-To-Let: A Promising New Asset Class, March 21, 2018