High mortgage rates in the Low Countries: what happened in the Spring of 2009?

Since the Spring of 2009, Dutch mortgage rates have been structurally high, both in comparison to the rest of Europe and to funding costs. This paper reviews the debate on possible causes, which are of two kinds: (i) the higher mortgage rates reflect higher funding costs; and (ii) softer competition has allowed higher price-cost margins for mortgage providers. Detailed margin calculations based on an established cost formula reveal that, while funding costs have risen substantially since the financial crisis, they do not fully explain the high mortgage rates, relative to very low base rates. Instead, there are competition concerns in Dutch mortgage banking since the financial crisis, in particular a high market concentration with established banks, exit of several foreign challengers, a remarkable restriction of competition through price-leadership bans imposed by the European Commission on three of the four largest mortgage providers, and funding capacity constraints in part resulting from tightened banking regulation. It is concluded that while several of the developments discussed together created market conditions rife for margin increases through coordination, the European Commission’s price leadership bans appear to have acted as a nucleus for the crystallization of high mortgage rates in the Spring of 2009.