What risks do you see for the economy?
In the first place, the exuberant share prices on the international financial markets. There, the compensation that investors receive for the risks they run is very low, even though they also perceive the risk as low. If at a certain point investors start to think that the risks are higher, then share prices could start to fall.
There is also the risk that is called ‘made in Holland’, which has to do with the housing market. The development of house prices is quite erratic and recently quite exuberant and you can ask yourself questions about that. There is still risky borrowing behavior and I am concerned about that.
Thirdly, climate change and the effects it will have on the Dutch and international financial sector are a risk. But that’s more of a long-term risk.
Do you see the high share prices as a risk?
Yes, to the extent that those highs come about because investors expect inflation and interest rates to remain at their current low levels until the end of the day. I do think that the current wave of inflation is largely temporary, but wise investors are also considering other inflation scenarios.
Last week, the minutes of the ECB (European Central Bank) showed that it is concerned about the risk of more inflation than is now expected. Of course, that would also lead to different expectations for interest rates and that could lead to price falls.
I think that’s also what we’ve been seeing a bit over the past few weeks. The moment news of somewhat higher inflation came again, this immediately led to price falls on international financial markets.
You referred to developments in the housing market as a threat to financial stability. How?
House prices are rising rapidly, it cannot continue like this. We all know that if house prices were ever to fall again, it could lead to damaging downward spirals. If consumers are flooded with their mortgage, this can lead to lower consumer confidence and lower economic growth.
There is now riskier lending behavior by home buyers. Often as much is borrowed as possible within the existing lending standards and home buyers borrow more often without interest. In other words, the vulnerabilities faced by households if house prices eventually fall will increase.
Do you expect a turnaround in the housing market?
I can’t predict that. The rising house prices are partly due to low interest rates and the interest rate policy of the central banks will eventually affect house prices. Again, I think the inflation wave will be mostly temporary, but both inflation and interest rates will turn out higher than we currently expect, rather than lower.
The low interest rates with risks for the housing market and equities are partly due to you, isn’t it?
Yes, in part it is, but I would like to make two caveats. In the first place, house prices in the eurozone are rising by 6.1 percent and in the Netherlands by 17.8 percent. That difference of 11.7 percentage points can hardly be attributed to the low interest rates. In addition, the interest rate is not only low because of the policy of the ECB, but mainly because there are more parties worldwide that want to save than parties that want to invest.
What should be done to reduce the risks for the housing market and investors?
In any case, what I want to warn about is the possibility that there will be more inflation than the ECB now thinks. That risk is simply there and if it actually happens, the ECB’s policy will also have to be adjusted. It is better if you also take less favorable scenarios into account.
But how much stimulation does the economy still need?
The monetary policy of the ECB is determined on the basis of developments in the economy of the entire eurozone. The Dutch economy has approximately made up for the corona damage, but that is not yet the case for the economy of the entire eurozone. We expect that to be the case by the end of the year, which is why the ECB believes it can end the emergency buyback program in March next year.
You also mentioned that you see climate-related risks for financial institutions. How does that work?
We conducted a stress test to determine the extent to which real estate investments are sensitive to the risk of flooding. That sensitivity is there, because there are important investment properties in locations that are vulnerable to flood risks. That means those who own that property have to factor in the depreciation of that property and any repair costs you will incur if a flood does indeed occur.