Dutch show how not to run housing policy

Following on from my earlier posts on the German, UK and Swedish housing markets, I now want to turn your attention to the Netherlands – a country that, in my view, offers a prime example of how not to run housing policy.

The Dutch have devised a system that all but guarantees unaffordable housing and a susceptibility to housing bubbles: (i) ridiculously easy credit, with a third of mortgages guaranteed by the government; (ii) mortgage interest tax relief and generous subsidies offered to home buyers; (iii) a dysfunctional rental market that encourages households to strive for owner-occupation; and (iv) severely restricted housing supply, which ensures that changes in demand flow predominantly into homes prices rather than new construction.

Each of these factors are explained in detail below, with most of the information sourced from the 2009 RICS European Housing Review.

But before I kick-off, consider the below charts summarising the key macro factors pertaining to the Dutch housing market.

First, nominal and real house prices:

As you can see from the above charts, the Netherlands has experienced two ‘bubbles’ since 1970 – one in the late 1970s and the current episode.

Second, consider the Dutch housing tenure, split-out by owner-occupation, public rental and private rental (courtesy of the NZ Productivity Commission).

Around 60% of homes in the Netherlands are owner-occupied, with the overwhelming majority of rental properties publicly owned.

Third, consider the rate of home construction in the Netherlands (courtesy of RICS):

Amazingly, the annual rate of home building actually fell between 1993 and 2004 at a time when home prices surged, suggesting significant constraints on land/housing supply (discussed below).

Finally, consider the growth and stock of mortgage debt in the Netherlands (chart courtesy of the IMF):

As you can see, the Netherlands has the highest mortgage debt to GDP ratio in the developed world.

Easy credit and policy incentives:

As suggested by the above chart, the level of mortgage indebtedness in the Netherlands is exceptional by world standards. For example, according to RICS, 62% of new mortgages were classified as “very large mortgages” in 2005, with average loan-to-value ratios (LVRs) of over 100%, whilst the average LVR of first time buyers in 2007 was a spectacular 114%!

There are several factors that have conspired to produce these exceptionally large LVRs and high levels of overall mortgage debt.

First, mortgage interest is tax deductible in the Netherlands. When combined with the high marginal tax rates, Dutch households have an incentive to load debt onto housing.

Second, the Netherlands Government provides loan subsidies to first home buyers as well as subsidies the purchase of homes by lower income households.

Finally, around a third of mortgages are guaranteed by the Government via the National Mortgage Guarantee scheme. Of course, the existence of this scheme encourages lenders to provide larger sums of credit than they otherwise would and/or encourages lending to marginal borrowers.

Dysfunctional rental market:

The Dutch rental market appears to also contribute to higher debt levels and home prices.

Rents are controlled in the Netherlands, with the same legislation applying to both the public (social) and private rental sectors. Rents are set based on a points system related to amenities and service charges, and bear little resemblance to market levels. And rents can only be raised annually by a rate set by the Government. Security of tenure is also guaranteed and temporary contracts are forbidden.

Because rental housing is regulated in this way, shortages are endemic in the more desirable locations. Further, existing tenants are favoured over new households and movers, leading to regressive distribution effects and social segregation.

The shortages of rental accommodation, therefore, encourages households to borrow large in order to become owner-occupiers, since that is the only ‘free market’ option available in most locations.

Supply-side squeeze:

Land supply is tightly constrained in the Netherlands, reflecting both planning constraints and geographical barriers from much of the nation’s land being located below sea level. From RICS:

Land release in the Netherlands is influenced both by a rigorous planning regime and because the land development process is organised such that local authorities provide the costly site infrastructure provision in a country where much of the land is below sea level or otherwise expensive to convert. Most housing is required in the Randstad core of the country but there is a long tradition of protecting the ‘green heart’ of that area from building. Added to this, general concerns about the environment have been increasingly interpreted in an anti-development way, familiar in other countries. The outcome of these pressures has been that development is severely curtailed in many parts of the country where housing is needed.

Recent planning strategies … have tried to direct most development to a limited number of brownfield sites and to a handful of large-scale, suburban localities – with the latter aimed at creating environmentally sustainable, mini-new towns… 80% of new housing is planned to be built on brownfield sites with an emphasis on self-contained communities…

The outcome is now widely recognised to have limited housing output. Problems arise in getting development underway, so it either does not happen or takes years to come on stream. Also, the mix of housing created is often inappropriate to satisfy market demand…

A feature of housebuilding is that the average completion time of dwellings from the point when a building permit is issued to the actual finished construction of the dwelling is long and rising…

In the mid-1990s almost half of all dwellings were completed in less than a year, and that number has now dropped to a fifth while those taking more than 2 years have risen from a negligible amount to 30% of all dwellings…

An extended length of building time, of course, tends to raise construction costs and in the Netherlands they typically rise faster than the general rate of price inflation. This means that the cost of housing construction is gradually rising over time, putting further strain on the country’s ability to increase its housing supply.

Another bubble factory?

Like the UK housing market, Netherlands housing appears to be particularly prone to bubbles and unaffordable housing. Dutch households are encouraged to borrow big for housing via deductible mortgage interest, direct Government subsidies to first home buyers and lower income earners, and the dysfunctional rental system. And Dutch banks are only too happy to lend, with a large proportion of the banks’ mortgages guaranteed by the Government.

At the same time, the straight jacket placed on land/housing supply ensures that the extra demand emanating from the above policies will manifest itself in rising prices instead of new home construction, and would likely contribute to steeper price falls in the event of a negative demand shock.

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Unconventional Economist
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  1. WOW! Thanks for this, now I understand why the charts were conflicting with my experience of affordability. Not many using common sense in my homecountry. I will comment more later, just wanted to note down a quick thank you before I start work. 🙂

    Oh, guess what. Read this morning that Dutch government is considering lowering stampduty from 6 to 2% for one year to try and fire up the housing market again…

  2. “with the overwhelming majority of rental properties publicly owned.”
    Not according to the chart.

    • The country circled is NZ, as it comes from the NZ Productivity Commission, as referenced as the chart origin.

      If you read to the left, you see “NLD” – or Netherlands – where the majority of rental properties is publicly owned (note how most of the bar is dark grey, which if you read the legend, says “public”)

    • A large chunk of the rental market is publicly owned because of the Government rebuilding effort after WW2. Because government had to take up the initiative they ended up owning most rentals.

      In the nineties this was privatised and the housing trusts became non-profit companies.

      Publicly owned rentals are only available for people with an income below a certain threshold.

  3. very interesting, I can understand it from the perspective though in that they have a shortage of land and are densly populated.

    What I would like to see is how the Swiss run their system, as they seem to have a better handle on everything economic.
    Quite topical as well with UBS buying ING’s Fund management in Australia.

    • Anecdotally from the graph above, it seems the Austrians (sic) are similar to Germany and Swiss as well, in terms of price stability.

      As I’ve said before, housing is more cultural than people think – the Dutch and Anglo nations (US, Us, UnZud, UK, Canada) share a cultural trait towards home ownership as the “only” financial goal of its constituents.

      This cultural gap will be infinitely harder to close than the credit demand/supply response regulatory/legislative gaps. i.e it will be nearly impossibly to turn Australians into Germans.

      Looking forward to the Swiss market as well Leith – great stuff.

      • “This cultural gap will be infinitely harder to close than the credit demand/supply response regulatory/legislative gaps. i.e it will be nearly impossibly to turn Australians into Germans.”

        I agree with this statement to a point. But remember that only half of the USA experienced a housing bubble (i.e. those states with restricted supply), suggesting that culture plays a relatively minor role.

        • I suspect there are significant difference in attitudes to, and regulation of, housing between Swiss cantons – possibly along the German/French language divide, but probably elsewhere as well.

          The cantons in Switzerland are quite individual and are more independent in many ways than US states. For anyone interested in the strangeness that is the Swiss political system (and Swiss society) I recommend Steinberg’s Why Switzerland? -http://dannyreviews.com/h/Switzerland.html

      • Agreed – but remember that a large proportion of Americans have a direct cultural heritage to Germany, and particularly their Protestant-based work ethic.

        The “US” is more than just 50 States – there are a myriad of cultures, counter cultures and nuances.

        The difference between Florida and Texas is as stark as Montana and NY.

  4. Does it really matter? NL is so small you could buy in Belgium and commute to Amsterdam everyday 🙂

  5. Leith

    Bubble factory yes, worse than Australia. No

    I’d like to see the median income to median house price ratio adjusted for tax deductibility of interest.

    One thing missing from your analysis is that Dutch borrowers are subject to strenuous servicibility tests. So they may borrow more on an LVR basis but not when compared to income.

    I believe that’s why the home ownership is at 60% and renters lease from not for profit. Those that can’t afford to borrow can’t. Australia is full of underqualified borrowers on any international standard which is the only way we have maintained 70% home ownership and very low affordability levels.

    • A valid point Deep T. I have a friend who happens to be a Dutch economist who used to work for the not-for-profit housing companies. I’ve sent him a link to get an insiders view.

      From our past discussions I get the feeling Deep T’s point about the serviceability of debts compared to incomes is reasonable – especially compared to Australia. My impression is that even though prices have boomed, they have not risen a great deal beyond incomes. Maybe a topic for a follow up post.

      Policy changes about tax deductibility etc might be another consideration in their price run-up.

      The other consideration in the Netherlands is the massive land reclamation projects. Eg Flevoland was completed in 1986 and now houses 370,000 people http://en.wikipedia.org/wiki/Flevoland

      Surely the anticipation of such projects being completed has an impact on prices elsewhere.

      But given that prices are back to their 2005 level in nominal terms, there does appear to have been considerable speculation in the market

    • Valid point Deep T. I am still convinced Australia is worse from an affordability point of view.

      When I went for a mortgage (in Holland) I could get 4.5x my gross annual income max. They include the mortgage interest tax deduction in the calculation which obviously impacts this ratio.

      All that mattered to FHB me was that I owned a home for a mere €115 net per week (mortgage interest + repayment – tax deduction). Granted, it was for a tiny 80m2 house, but hey… at least I had money to enjoy life and go on holiday three times a year.

      That said, the situation as a whole seems like it’s an economic disaster waiting to happen…

    • All fair points. I have been unable to obtain dwelling price-to-income ratios on the Netherlands, so my analysis is partial at best. But it still offers some insights about what not to do.

      • Median pay in Holland is €30,000 annually, average property price €240,000. Yes, this is a shameful 8 annual salaries but remember the tax return and the fact that the median salary figure includes the salaries of lower incomes who generally tend to rent rather than buy. Rentals cost an average of €755 per month (€499 average in the 800 segment). On top of that Dutch government subsidises part of the rent for the lowest incomes.

        Housing market in dwellings:
        rentals: 2.908.551
        buy: 4.058.651
        unknown: 252.025
        total: 7.219.226

        • sigh… same error as when I previously posted this data. This dropped off:

          Rentals cost an average of €755 per month (€499 average in the sub €800 segment and €1,132 average in the €800+ segment).

        • Why are you comparing median to average? Median income is a little over 53,000 per household. Making it 4,5 salaries.

  6. Hey, but at least they can all by cheap weed! 😀

    In all seriousness though, great article, hard hitting with undeniable factual evidence. A+

  7. Another good article UE.

    Holland seems to be not that different to Aus in regards using policies that accelerate debt – good for banks chasing interest.

    One obvious difference is Aus allows interest to be claimed by investors only.
    Imagine the whack to Treasury finances if all could claim interest as deduction. Ouchie.

    There are 2 other major differences I can see.

    (1) Population growth rates and (2) data used by govt here to co-ordinate social infrastructure/services.

    1. World Bank figures have Aus @ 2.05% and Holland @ 0.21%.
    Aus has lost the plot on immigration in as much as we are high growth (not a bad thing of itself) but not high productivity. We consume more than we produce. Evidence here:

    If Current Account Balance could be thought of as an indicator of economic strength then Holland @ $46.69B (+) is streets ahead of Au @ minus $35.25B (-).

    2. On top of x10 the population growth rate of Holland, Aus has mammoth student programs. Amazingly (last I checked in 2010), the impact of student and temporary visa holders on such things as housing (renting) or services was not included in ABS calculations. The numbers are not small and must put upward pressure on rental costs, provision costs of services etc.

    Most recent data has Student Visa program figures at 762,160 (inc 332k primary and 48k high school students).

    Both rapid population growth and inability of ABS to locate data published by Dept of Immigration and Citizenship pressurize, amongst other things, access to affordable housing in Aus.

    Major work needs to be done to balance all these forces.

  8. Shortage of land or being below sea level has exactly nothing to do with it. As the article correctly states; it is all about the banks lending far and wide with state guarantees, subsidies and insurance (for which renters pay tax money as well). Until not long ago the majority of new mortgages were interest only! The Dutch housing market is one gigantic state sponsored pyramid scheme. Shifting wealth up, generational as well as income. It is clearly unsustainable but the Dutch government keeps scrambling to keep housing prices high. Why? Well, I guess the Netherlands is controlled by the financial sector (gone bad). Just MHO.

  9. This article is very good. At Dutch forums I’m arguing that prices are artificially kept way too high for a few years now.

    Two more issues:

    1) In the nineties, new regulation let people take a mortgage on two incomes (as opposed to on the highest income). This caused higher prices and more debt as well.

    2) It is remarkable how the whole sum of policies works out great for the boomer generation. They bought their houses in the 80’s, with large subsidies, when (ground)prices were low. Gaining several yearly salaries while selling is no exception for them these days. The people who are now in their 30’s are paying for it.

  10. Drunken Sailor

    Thanks for this well written article about the rigged housing market here in the Netherlands.

    I’m a 23 year old male and I will, in spite of reasonable personal financial prospects, postpone buying a home for at least another decade.

    IMO the housing market in the Netherlands will continue to be under stress due to the following factors:
    1) Demographic shifts, as the babyboom generation retires there will be lots of offerings in the mid and high end segments of the market
    2) Increasing scarcity of credit. I believe that credit will become more scarce due to one hand tougher capital requirements for banks and on the other harsher economic prospects. Banks will also be more hesitant to lend if the downturn in housing continues.
    3) Ending of government incentives, such as the mortgage guarantees and perhaps even the mortgage interest deductibility. Our current coalition government has promised not to amend the tax deductibility of mortgage interest. All opposition parties oppose this regulation and therefore it will likely end after the next parliamentary election

    Still, the financial markets continue to view Dutch mortgage debt as financially sound, this is particularly due to low number of non-performing loans. However, since the financial crisis this perception is slowly changing, with the number of Dutch mortgages being underwater steadily rising.
    A medium sized Dutch mortgage bank (SNS)issued a 30 year RMBS in December last year with the most senior tranche being only 50 bps above the reference rate.
    A primary driver for this cheap funding is what I consider an abundance of ‘ dumb money’. The Netherlands has a mandatory pension fund system that is well funded and legally required to put a share of their funds in ‘low risk assets’. With the babyboom generation about to retire I suspect that this supply of money is about to run dry.

  11. Another really great analysis from Leith Van O. I am sorry I missed it until now.

    The Netherlands DID manage to keep a lid on prices for years, by the way they used their government powers of compulsory acquisition to stop “planning gain” from occurring. The land was re-sold by the responsible authority only at prices that covered the cost of providing infrastructure and no more.


    But I am convinced by what has happened now, that this is no longer a convincing option for the prevention of house price bubbles.

  12. Johan van Andel

    I am Cameron Murray’s (see comment above) Dutch economist friend. Below my reaction to the article:

    The Dutch housing policy is, I think, really different than anywhere else. Social housing corporations own a large part of the houses and rent them out way under the market price. Buyers can deduct their mortgages from taxes. All that costs the government quite a bit of money seeing that both renting and owning are actually subsidized. Maybe that’s also why taxes are so high here? I think that the whole market has to be reviewed and changed. Changing a single thing will not solve all the issues. Also Europe wants Holland to change some of its policies to have a more uniform market. That is hard to do overnight though. We don’t want a crash in house prices and let people go bankrupt (example: Sweden after abolishing tax deduction overnight).

    At the moment house prices are going down due to the crisis. People have no faith in the market. They are afraid the tax deduction might go away and they will get a problem. Politicians are divided concerning this issue. People want to move but not before they sell their own house. They’re not selling at the moment, so they also don’t buy. The number of transactions at the moment is at its lowest in years. Last week the government decided to get rid of part of a ‘moving tax’ we have (stamp duty) for the next year. When you sell your house the buyer has to pay 6% tax. If you would sell it the next day again, the new buyer has to do this again. People always want to get their money back so every sale they want to have at least a 6% price increase, which they don’t get at the moment. Also a major reason why sales are so low now. The tax now goes to 2% for the coming year. This means that for instance an average house just became 9.000 euro’s cheaper overnight. Will this mean people will buy more? Only time will tell. Brokers experience a lot more interest all of a sudden. But will more houses sell or will people want more for their house now they know the buyers don’t have to pay the tax so they can spend more on the house? A buyer is usually mostly interested in what the total monthly payment will be and not per se the price of the house. (It is by the way getting harder to get a mortgage in Holland then before. The article might not be completely current in that aspect.)

    The writer of the article says a lot is ridiculously easy in Holland (getting credit for instance). I actually think mortgage rates are very high in Australia and without tax deductibility starters who want to own have almost no possibilities with demanded down payments and the current house prices. My or the authors point of view will also depend on what you experience as ‘normal’ I guess. This has a lot to do with the country you are in yourself. As far as facts are concerned the article is pretty close to the truth. A good effort in my opinion.

    • Thanks Johan. The data and facts used in the article are two years old, so I am not surprised that the situation has changed somewhat. Your excellent comments have helped to bring my research up to date.
      Cheers Leith

  13. Leith, you deserve to have people from all over the world coming here to advance theirs and yours and everyone else’s understanding of property bubbles wherever they occur. You are doing a great job. I don’t know what other site anywhere in the world is doing anything quite like it.

  14. The Dutch housing pyramide is created by local governments that limit the supply of land in order to get high prices. Local authorities have made huge amount of money from using this land monopoly. At this moment the bubble is bursting and local government can’t sell land anymore at these high prices. This addiction to easy money from land is now turning against them, and local authorities need to cut back spending.
    Keep in mind that the Netherlands has no free housing market. It is government that controls this “market”.

  15. Philip Pilkington

    Anyone know what sort of exposures the Dutch banking system might have? I know that almost 50% of RaboBank’s loans are Dutch mortgages?

    Any good resources on this? Anyone well informed? It’s pretty important that I find out…