2022 has been a highly unusual year for investors. The war in Ukraine followed by distorted food and energy supply chains resulted in high inflation and some of the fastest rate hikes in history. These events resulted in decreasing asset prices across all markets and one of the worst years in history for a 60/40 portfolio. Previously, we compared the performance of Dutch mortgages, using the LoanClear Dutch Mortgage Index, to other European asset classes up to the first half of 2022 [1]. The LoanClear Dutch Mortgage Index provides insights in the performance of Dutch mortgages.

In this article we take another look at the performance of Dutch mortgages compared to other European asset classes with data updated up to the end of 2022. The LoanClear Dutch Mortgage Index used in this article is a market weighted index with loans originated from 2016 onwards.

Figure 1 shows the total return of the different asset classes from 2016 up to 2022. Over the whole period equities had the highest return, followed by high yield and Dutch mortgages. In Q4 2018 equities, high yield bonds and REITs dropped amid global trade concerns and slowing economic growth. In this period government yields generally dropped as investors fled to safe assets. During Q1 2020 most asset classes fell sharply because of the coronavirus and lockdowns. During this period, again investors fled to safe assets which caused government yields to fall. During both of these short term dips, mortgages were not affected as much as the other categories except government bonds. A possible explanation for this is that mortgages are illiquid and cannot be bought or sold easiliy so they won’t experience sell offs like liquid investments.

Figure 2 focuses on the performance during 2022. Dutch mortgages experienced increased spreads in the first half of 2022 and suffered from a larger initial performance drop compared to the other asset classes, except REITs. Furthermore, equities, high yield, IG and REITs recovered in the last quarter of 2022. Towards the end of 2022 investors hoped that inflation had peaked. Moreover, an unusual mild winter resulted in decreasing gas prices which alleviated some cost pressures. The eased risk sentiment boosted risky assets and resulted in tighthening credit spreads [2]. REITs suffered particularly during 2022 with a loss of more than 35%. REITs have been hurt more by the increase in interest rates, and consequently decaresing property prices, than the other asset classes.

Figure 3 provides insight in the annualized return components of the LoanClear Dutch Mortgage Index over the period 2016 – 2022. Clearly the discount rate effect has the biggest impact on the performance. As of A4 2022 market rates are higher than the average coupon rate of the index and valuations are below par. Noteworthy is the credit performance effect which is virtually 0. The Dutch mortgage market is characterized by low late-stage arrears [3]. Furthermore, in case of a default, losses have been limited due to the strong housing market and NHG coverage.
     Figure 4: Arrears of LoanClear Dutch Mortgage Index.
     Source: EDW, HDN, Hypotheekbond, LoanClear, 2022

During the first months following the coronavirus outbreak there has been a peak in arrears. Probably, this peak is partly explained by payment holidays that are reported as arrears. There are some worries that high inflation and higher interest rates will cause payment problems for borrowers. So far Dutch mortgage credit performance has remained resilient with delinquencies in the 0-1 month bucket below 15 bps and even below 5 bps for the other arrears buckets as of Q4 2022.

Dutch Mortgage Index
The LoanClear Dutch Mortgage Index gives a transparent and reliable measure of performance of the Dutch residential mortgage market by combining public data sourced from the European DataWarehouse and non-public data directly from mortgage investors and lenders. The LoanClear Dutch Mortgage Index is useful to benchmark a mortgage portfolio and for Strategic Asset Allocation and Asset Liability Management purposes. Next to a market weighted index, LoanClear also offers customized indices that allow mortgage investors to benchmark their mortgage portfolio with a portfolio with similar segment weights, or track the performance of specific segments.

Since recently, a version of the LoanClear Dutch Mortgage Index is publicly available on our website: https://loanclear.com/dutch-mortgage-index. This index is based on data from 2017 onwards and there is the possibility to filter on NHG or non-NHG.

References
[1] Dutch Mortgages in a Multi-Asset Portfolio
[2] Schroders – Quarterly Markets Review – Q4 2022
[3] Fitch – Global Housing and Mortgage Outlook - 2023

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