Inflation has been a major topic in financial markets for the past months. High inflation is one of the factors that has driven up capital market rates and mortgage rates for the past months [1]. Last quarter we focused on the effect of inflation on consumer and SME marketplace loans . Furthermore, we showed that the high inflation was primarily caused by increased energy prices [2]. Since then, inflation and energy prices have increased further. In this article we focus on the impact of the increased energy prices on the monthly income buffer of Dutch mortgage borrowers and estimate what effect this may have on arrears going forward.

Energy prices

Energy prices in the Netherlands were 350% higher in January 2022 than the year before. This increase is caused by several factors. 2021 started out with low temperatures, causing the use of gas for heating to go up. This resulted in relatively low gas stocks as of December 2021. Besides that, the Dutch domestic gas production has been significantly lower after the decision to reduce gas drilling in Groningen. Furthermore, since December 2021 an escalation between Russia and Ukraine was feared. This resulted in increased tensions between the EU and Russia, EU’s largest gas supplier, and brings uncertainty and therefore higher prices [3]. Since then, gas prices have been volatile. As a consequence of the increased energy prices, six energy providers were declared bankrupt. Companies in sectors with high exposure to energy prices such as datacenters [4] and greenhouses are foreseeing severe problems [5]. For households the effect of the price increase is partly offset by tax discounts and an extra one-time compensation of 800 euro for households with the lowest income. The total costs of this compensation package are expected to be 2.8 billion euro [6]. Not all households are affected, as about half of the market has variable rates. Nevertheless, CBS expects households to face a 86% increase in energy costs in 2022 on average. This translates to an increase of monthly energy payments of about 110 euro on average [7].

Monthly income buffer

For our analysis we asses how the monthly income buffer is affected by the changing energy prices. The monthly income buffer is the amount of a household’s income that is left after deducting living costs. The monthly income buffer serves as a measure of the financial situation of the borrower and gives an indication of the the amount of ‘breathing room’ in case of financial setbacks. Intuitively, a household with a high monthly income buffer is less likely to face payment problems than a household with a low or negative income buffer. The increase in energy costs negatively impacts the income buffer of mortgage borrowers. A recent study found that borrowers with more energy efficient houses are less likely to default on their mortgage payments in the Netherlands. One of the potential explanation they provide is that improvements in energy efficiency results in less energy costs, and thus more disposable income for the mortgage payments [8]. Similar results in the residential sector have been found in the US [9] and the UK [10].

Data

We analysed the impact of the increase in energy prices on the monthly income buffer of Dutch mortgage borrowers. For the analysis we use loan-level data of Dutch mortgages from European DataWarehouse, which consists of ECB eligible RMBS deals. We indexed the reported incomes with data from CBS, to get a more up-to-date estimate of the borrower income. Finally, we used estimates for costs of living for different income classes from NIBUD.

Effect of increased energy prices on monthly income buffer

Figure 1 shows the distribution of mortgages over monthly income buffer buckets before and after applying the increase in energy prices to the borrower’s costs. The tax compensation by the government is taken into account in the increased energy costs, but the one-time compensation for households with the lowest income is ignored. After accounting for the increase in energy prices, 19% of the loans have a negative income buffer. This is a significant increase from 10% before applying the energy price increase.

Figure 1: Distribution of loans over Monthly Income Buffer buckets. Source: LoanClear, European DataWarehouse, CBS, NIBUD

Figure 2 shows a historical breakdown of the amount that is more than three months in arrears for each monthly income buffer bucket. Based on the historic average arrears for each monthly income buffer bucket and the shift in monthly income buffer buckets caused by the increase in energy prices, we could expect a moderate increase of loans that are more than three months in arrears from 0.32% to 0.33%.

Figure 2: Amount more than three months in arrears by Monthly Income Buffer bucket. Source: LoanClear, European DataWarehouse, CBS, NIBUD

References

[1] fd, Hypotheekrentes stijgen rap, tienjaarvasttarief is verdubbeld sinds oktober

[2] LoanClear, Asset performance during periods of high inflation

[3] fd, De energieprijzen zijn torenhoog. Wat te doen als consument?

[4] fd, Datacenters in het nauw door hoge energieprijzen

[5] fd, Hoge gasprijzen dwingen vier van de tien glastuinders definitief of tijdelijk te stoppen

[6] fd, Twee dagen debat over compensatie energie

[7] CBS, Prijs van energie 86 procent hoger

[8] M. Billio et al., “Buildings’ Energy Efficiency and the Probability of Mortgage Default: The Dutch Case,” J. Real Estate Finance Econ. May, 2021

[9] N. Kaza et al., “Home Energy Efficiency and Mortgage Risks,” Cityscape, 2014

[10] B. Guin and P. Korhonen. “Does Energy Efficiency Predict Mortgage Performance?,” BOE, Feb 2020

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