While there are signs that house price increases may be slowing down and more supply is entering the market, there is another factor homebuyers need to consider—inflation, writes financial adviser José de Boer.

Inflation, the gradual rise in prices over time, often has a bad reputation due to its effect on the cost of living. However, for homeowners—particularly those with fixed-rate mortgage debt—moderate inflation can be beneficial.

The CBS’s Dutch flash inflation forecast for January, at 4.1%, has caused some concern, particularly as the Dutch figure is one of the highest in the eurozone. Controlling inflation is a key economic priority, with the European central bank  aiming to keep the eurozone rate around 2%.

If inflation is too high, the ECB raises interest rates to make credit—and mortgages—more expensive, cooling the economy and bringing inflation down. Conversely, if inflation is too low, the bank lowers interest rates to make credit cheaper, boosting investment and spending, which then increases inflation.

Borrowing

Lower mortgage interest rates increase the amount you can borrow to buy a home. Given that prices are still rising—11.5% in the final quarter of last year, according to the NVM—this can be a positive development for buyers.

If you already own a property, inflation can have advantages as well. Mortgage debt is usually fixed in nominal terms, meaning the amount you owe does not adjust for inflation.

As inflation rises, the value of money decreases, effectively reducing the “real” value of your debt over time. For instance, if you owe €200,000 on a mortgage and inflation causes wages and prices to rise, the €200,000 becomes easier to repay in “real” terms as your income increases with inflation, while the amount you owe stays the same.

Property prices

Inflation often leads to an increase in property prices too. As your home’s market value rises while your mortgage debt remains unchanged, your net worth grows. This is particularly significant in markets with limited housing supply, like the Netherlands, where inflation can further drive up real estate prices.

Homeowners with fixed-rate mortgages are also shielded from inflation’s impact on borrowing costs. While inflation may push up interest rates for new loans, your mortgage payment stays the same if you locked in a low fixed rate.

In the Netherlands, mortgage interest rates are now twice as high as they were two years ago, but they have dropped slightly over the past few months in line with ECB cuts. Currently, you can expect to pay between 3.8% and 4% on a 10-year fixed mortgage.

Flash forecast

The CBS flash forecast, while showing an inflation increase, indicates that it was around 3.3% last year. The Dutch central bank’s December forecasts suggest inflation will remain at roughly 3% in the Netherlands in 2025.

Given inflation’s effect on mortgage debt and home equity, real estate is often seen as a smart investment during inflationary periods. All the more reason not to delay your plans to buy a new home in 2025!