Klaas Knot: Introduction to the press conference
Introductory remarks by Mr Klaas Knot, President of the Netherlands Bank, to the press
conference of the Financial Stability Report, 11 October 2021
* * *
Welcome to this press conference on the Financial Stability Report (FSR). I would like to start by
walking you through the main elements of the report that we have published today.
Fortunately, the situation now is very different to how it was when we met at last year's press
conference. Then, we were right in the midst of the second wave of the pandemic. So, I am glad
that today, I have the opportunity to see you in person, rather than virtually.
There has also been a considerable improvement economically. The economy has recovered
strongly from the blow we were dealt by the pandemic. Mainly due to high rates of vaccination,
social distancing measures have been phased out, and society has almost been completely
reopened.
The economic recovery is actually stronger than we expected. The economy has rebounded in a
short time, and estimates both in the Netherlands and worldwide have in many cases recently
been revised upwards.
The fact we went into this crisis with substantial fiscal buffers is largely to thank for the buoyant
economic recovery. This enabled the government to absorb the greatest blow, and to support the
economy. And thanks to their higher capital buffers, banks have also been able to make a
positive contribution.
The threat of a resurgence in the pandemic has not disappeared completely. But even in the
event of a new wave of infections, I am still reasonably optimistic. The economic impact of new
waves will be lessened considerably as the economy has to an increasing extent adapted.
Now government support has ended, the right market dynamics have been restored. Although
there will undoubtedly be businesses that still run into difficulties, I don't expect this to lead to a
large wave of bankruptcies. The economic recovery is robust, and most businesses are
essentially healthy.
I'm optimistic about the economic recovery, although I am less positive about the build-up of
financial vulnerabilities and risks. Precisely now that the economy is improving, we tend to be
less aware of the vulnerabilities building up. And that is something I would like to guard against.
In view of this, our Financial Stability Report specifically focuses on four themes: financial
markets, the housing market, climate risks and bank buffers. I would like comment on these first
two topics.
Financial markets
First, international financial markets. Since the unrest of March 2020, risky behaviour among
investors has increased sharply again. Spurred on by low interest rates, investors are sailing
close to the wind and the appetite for risk is high.
This is reflected in high price-to-earnings ratios on equity markets, ever-lower risk premiums on
risky bonds, and historically high issuance levels of risky corporate debt, which is often also
highly leveraged.
This risky behaviour is only sustainable at low inflation and interest rates. Increasing inflation is
making financial markets jittery, fuelled by fears of a tightening in monetary policy and rising
inflation. And that is precisely what we have been seeing on the stock markets in the past few
weeks: sentiment is less exuberant, as inflation is again back on investors' radar.
I also still expect that the inflation shock we are currently witnessing is largely temporary.
Nonetheless, from the perspective of healthy risk management, it is also important to take other
scenarios into consideration. Also because the 1970s taught us that we do not have an unlimited
capacity for envisaging how temporary inflation is. If financial markets fail to take sufficient
account of scenarios involving persistently high inflation and its accompanying interest rate
environment, it could lead to shock price falls in the future.
Housing market
On to the Dutch housing market. It won't have escaped anyone's attention that house prices
have risen even more steeply this year.
Over the past five years house prices have on average risen by 8 per cent annually, but we have
recently seen nationwide annual rises of over 15 per cent. House prices are also rising faster in
the Netherlands than elsewhere in Europe, so this cannot be ascribed solely to low interest rates.
There is a persistent shortage on the supply side of the housing market, and additional housing
construction efforts are certainly required. However, housing shortages have always existed and
will probably never completely disappear in a densely populated and neatly organised country like
the Netherlands.
The exuberant rise in house prices has more to do with Dutch households' borrowing capacity.
There is quite simply too much money and too few houses. Buyers are stretching the
boundaries to place the winning bid, displaying increasingly risky lending behaviour. Particularly
first-time home buyers are more often borrowing at the limit relative to their income. It is still
possible to finance the full value of a property with a mortgage. Interest-only mortgages are
again becoming popular.
The many tax advantages available serve to drive up house prices even further, with mortgage
interest tax relief the clearest example of this. Schemes that were introduced to give first-time
buyers greater opportunities in the housing market are unfortunately mainly having an adverse
effect. Altogether, this causes spiralling higher house prices and increasing debt levels.
Lending behaviour developments are generating risks for households and financial institutions.
Banks, however, do not yet take sufficient account of the systemic risk inherent in the housing
market. They are vulnerable to the impact that a price correction on the housing market would
have on economic activity, and thus on the quality of their loan portfolios. In order to increase
their resilience, we will introduce the previously announced floor for risk weighting of mortgages
on 1 January 2022.
Final remarks
Now the recovery of the Dutch economy is gaining traction, it is important to refocus on structural
vulnerabilities. On the housing market, but of course also when it comes to the energy transition
and the problem. The formation of a new coalition government offers the perfect opportunity to
set out appropriate policies in these areas.
This concludes my introductory statement. I would be happy to answer any questions you may
have.