Dutch pay the price for poor housing policy

By Leith van Onselen

In June last year, I published a detailed article, entitled Dutch show how not to run housing policy, which argued that the Netherlands housing system all but guarantees unaffordable housing and a susceptibility to housing bubbles, via:

  1. ridiculously easy credit, with a third of mortgages guaranteed by the government;
  2. mortgage interest tax relief and generous subsidies offered to home buyers;
  3. a dysfunctional rental market that encourages households to strive for owner-occupation; and
  4. severely restricted housing supply, which ensures that changes in demand flow predominantly into homes prices rather than new construction.

Now it appears the chickens are coming home to roost, with Dutch house price falls accelerating. According to the National Statistics Agency, Dutch house prices fell -8% in the year to July to be down -15% since prices peaked in 2008. Prices are now back at 2006 levels (see below chart).

Housing demand in the Netherlands is now falling. House sales dropped by -3% year-on-year, with the decline in demand resulting from falling household disposable income, low consumer confidence and rising unemployment amid weak economic growth.

Due in part to the Netherlands’ generous mortgage tax relief, which allows home owners to deduct from tax all interest payments for a maximum period of 30 years, Netherlands’ mortgage debt is among the world’s highest, amounting to 110% GDP currently according to the Dutch central bank.

However, the decline in house prices, combined with high levels of mortgage debt, has now left many Dutch households exposed to ‘negative equity’, whereby the property is worth less than the mortgage debt. And the reduction in household wealth is reportedly contributing to the downturn in household spending, which is exacerbating the the Netherlands’ current economic slowdown.

The outlook is not good either.

Earlier this year, the Dutch Central Bank forecast that house prices would continue to drop through 2014 as stricter mortgage lending rules and a reduction of the homeowner tax break takes effect. The Central Bank also predicted that economic growth in the seven years through 2014 will be the lowest since World War Two, which follows the European Commission’s recent forecast that the Dutch economy would shrink by almost -1% this year.

Likewise, ING Group earlier this month forecast that values could fall by another -5% next year, and expects one-in-four mortgaged homes will exceed their value. ING’s forecast follows that of the Dutch Central Bank, which last year projected that a -10% fall in home values would place 30% of all mortgages into negative equity, leading to losses at the four Dutch commercial banks, where about one third of lending comes from mortgages and which are already reporting rising mortgage delinquencies.

Clearly, there is more pain to come for the Dutch economy, which is now paying the price for years of poor housing policy.

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.



Unconventional Economist


  1. reusachtigeMEMBER

    Gee, poor Dutch. I feel for them. I’d hate it if we had poor housing policies like them that created one of the biggest housing bubbles of all time. Hmmmmm – the Dutch and their diseases.

  2. They should relax – Ms Ellis of the RBA shall give them a call and explain the virtues of non- responsive housing supply when the bust comes.

    A lack of supply is the best thing to a keep a bubble inflated.

    That and forcing down interest rates.

    Plus ignoring the sensitivity and risks posed by high levels of household debt.

    Oh – and some first home buyer grants.

    A few tax concession to encourage speculating on capital gains rather than yield.

    Easy – job done!

  3. I dodged a bullet there!

    It’s not just the housing policy to blame though. Deregulation of banks and lax lending are probably as much or more to blame!

    NL experienced something similar late 70’s which led to way faster declines due to forced selling as people were unable to service loans which had a much higher interest rate back then. The current low rate allows more people to hang on by a thread leading to a locked market.

    The recent acceleration may have been due to uncertainties regarding the height of stamp duty after June which may have brought forward sales.

    • Whilst de-regulation of banks certainly has a major influence you should read Leith’s analysis of the US Southern States. These states all had the same lax lending laws that the rest of the country had, but very ‘liberal’ development and housing policies. They didn’t have a bubble.

      It would be interesting to see a case study of an economy with very tough lending laws along with tight urban planning regulations as it would give us a better idea as to what is the main factor in creating housing bubbles.

    • And South Korea is the killer counter-example. “Tough credit” doesn’t come tougher than there. Young people typically try and save 60% to 90% of the purchase price of their first home. Yet after South Korea enacted urban growth constraints based on the UK’s system, in the 1970’s, house prices went up, and up, and up ….. and young people’s savings went up, and up, and up ….. with house prices rising faster than most of them could save money. Marriage and birth rates collapsed.

      I believe “median multiples” in Seoul have been as high as 15. Yet there is NO “debt overhang” accompanying this, rather there is a high level of savings and investments.

  4. Another Dutchie here … Looking at the graphs a further -20% correction seems to be needed at minimum to create anything sustainable. I was lucky and sold in 2006 there. I’m going bank to Europe for some years – interesting to watch how the market develops.

    Leith, you must be of Dutch descent as well I guess given your surname?

      • That’s the same as me!!

        The old man went back over there a couple of years ago to where he was born and raised. The farm his family had was no longer there and a multi-storey apartment block was in its place. He asked what they sold the units for and it was min 250k euro a piece.

        Swifty – who also has a long unpronouncable surname begining with “V”

    • Jeez… I never picked up on that! So obvious too!

      I’m planning to go back eventually (not for a while though) and my plan is to keep renting, save like crazy and hopefully enjoy affordable housing after the Dutch housing bust is over.

  5. It seems surprising given that the Dutch banks limited mortgage lending to a mere TWELVE times income….

  6. Would be interesting to know if the Dutch had their own brand of property spruiker telling everyone that property was the greatest investment in the history of history. We certainly have our fair share.

    • Obviously, and the usual suspects.

      That said, nowhere near the extend of what is going on here. Housing is also not seen as an “investment” as much and investment properties are nearly non-existent.

  7. Wow, it sounds so familiar…

    “1.ridiculously easy credit, with a third of mortgages guaranteed by the government;(can be read with bank deposits guaranteed)
    “2.mortgage interest tax relief and generous subsidies offered to home buyers;”(can be read: with negative gearing)
    “3.a dysfunctional rental market that encourages households to strive for owner-occupation; and
    4.severely restricted housing supply, which ensures that changes in demand flow predominantly into homes prices rather than new construction.”

    This looks like plagiarism, can’t be Dutch creation, because this policy is our intellectual property.

  8. I can sort of understand the Dutch having restricted supply due to the fact that most of it is reclaimed from the sea. I believe they are the most densely populated nation in Europe.
    i agree though its all sickenly similar to us.

    • That is true about density in NL. Actually, the way NL has had its cake and eaten it too with land rationing and yet keeping a lid on urban land prices (most of the time) is by powers of “compulsory acquisition” of land for urban development at prices deliberately only a small margin above true rural prices. Fair enough – why should some land banker be handed a few thousand percent capital gain by urban planners?

      See, for example, Alan W. Evans “Economics and Land Use Planning” (2004).

      But something has obviously gone horribly wrong in NL now.

  9. I’m just pleased to know that Australia’s unresponsive supply and distribution of debt will ensure that this could never happen here….

  10. I actually lived in NL for a few years and was lucky to sell my house in mid 2007. They hardly sold another house in that little village since then. When I came here I had plans to buy but quickly realized all is not well with housing in Oz. Still renting and waiting. Thanks to MB for many hours of interesting research and comments, this is my first post but have been around for a few years.