Dutch housing downturn crunches economy

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By Leith van Onselen

I have written previously how 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 the Dutch are paying the price for its bubbly housing policy, with house price falls continuing to accelerate. According to the National Statistics Agency, Dutch house prices fell by -8% in the year to December 2012 to be down -18% since prices peaked in 2008. Nominal prices are now back at June 2005 levels (see next chart).

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The sharp fall in house prices is having an adverse impact on the Dutch economy, with household disposable income, consumer confidence, unemployment and economic growth all weakening significantly.

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, as well as a series of exotic “interest-only” mortgage products created to maximise tax deductions, 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 contributing to the downturn in household spending, which is exacerbating the the Netherlands’ current economic slowdown. From the Economist:

The Dutch weakness is consumer spending, which has been falling for a year and a half. Household consumption last year was lower than in 2006. Consumer confidence fell to the lowest level ever measured in February. The chief source of anxiety has been house prices. Over the past decade, Dutch housing experienced a bubble comparable to those in Spain or Ireland. But house prices dropped by 6% last year and have fallen by 16.6% from their peak. Feeling poorer, homeowners have simply stopped spending.

The outlook is not good either. The European Commission recently cut its forecast for the Dutch economy and now expects a second consecutive year of contraction as domestic demand remains depressed. Meanwhile, in its Article IV consultation, concluded last week, the IMF noted that “the ongoing but necessary deleveraging of household and bank balance sheets will continue to weigh on economic activity over the medium term”, whilst also acknowledging that the “banking system still remains heavily exposed to the real estate sector and dependent on wholesale funding, and its process of balance sheet adjustment is also expected to remain in train for the foreseeable future”.

The IMF also forecast Dutch GDP to “contract by 0.5 percent in 2013 before gradually recovering by 1.1 percent in 2014” and noted that risks are skewed to the downside:

The interaction of household and bank balance sheets linked through changes in house prices makes the outlook subject to unusually large uncertainty. Expectations that house prices need to adjust by more than is currently assumed would restrain both household consumption and lending by banks, which could in turn lead to a continuing cycle of falling house prices and deleveraging.

To add insult to injury, the Netherlands is facing a rapidly ageing population, which is likely to drag on consumption and growth for decades to come, and hinder the economy’s ability to sustain high levels of household debt (see next chart).

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

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  1. ” the reduction in household wealth is contributing to the downturn in household spending, which is exacerbating the the Netherlands’ current economic slowdown.” And therein lies the property market Catch 22. Rebalance the property market, and suffer an economic downturn; or do nothing, as the Dutch and Others have done, and suffer an economic downturn. It’s no wonder our Governments are supporting the status quo (as did the rest of them!) and hoping for a miracle. But if the same meat is put into a Dutch salami as an Australasian one, a similar sausage is produced.

    • @Janet – well put – although with each added variety of meat to the sausage, the delayed economic downturn just gets that much bigger.

      Unfortunately with each successive ingredient, the sausage gets that much thicker and the new ingredients available to these economic butchers become scarcer and scarcer.

      The UK is almost at that point – now reverting to almost giving property away – silly sausages!

    • So when this starts to unfold in Australia what impact on banks will this have and because of the huge debt that banks carry could this get to the point of banks needing bailouts.

      There is another issue, there is some fact behind 1000’s of applications that have been forged by bankers and agents, this would allow people who go under water to simply walk out on their mortgage if they wanted. Many of these people can’t get access to their original applications because they banks use a company to hold documents and tell them to go to that company, but the company says sorry, we don’t have authority and tells them to go back to the banks.

      Big trouble ahead for our banks I am afraid.

    • It’s never actually “Housing Policy” unless it involves “supply” being enabled to provide houses with minimal “planning gain”.

      It is inevitably “mortgage debt increasing” policy. The numbers of households that get to own their own home is never much different, it is just that prices of houses, and debt, is much bigger, and the number of people who “own” 100% of their home, or 90%, or 80%, is lower.

      “Supply” is the key thing to argue. “Credit” whether loose or tight, won’t change “home ownership” or “housing affordability”. It will merely determine how much debt is involved.

      Higher home ownership in the past has always been the result of much more elastic housing supply, not the result of tougher credit. Tough credit with inelastic housing supply will merely result in the people who can’t get a loan, also being unable to save enough to catch up with rising house prices.

      • Spot on! I remember Melbourne developing new suburbs….no phone; no sewerage ( the Dunny Man came to empty the can once a week!); no made roads; no drainage (ditches dug down where the road would eventually be – household water-waste just draining away) and building blocks allowed to build even just half-a-house to get going. But it was affordable – a start. And it didn’t kill us, and got many people into their homes. Today, those suburbs are well serviced, well populated. Sure, things have changed in 50 years…but we didn’t have 50 years worth of debt to have to deal with!

      • Thanks Janet – and I also consistently argue that the cost of getting infrastructure in is far less than the cost of the wealth transfer that first home buyers are hit with under the status quo. If we just hit everyone with a $200,000 lump sum tax to “pay for infrastructure” when they turn 20, how fair would this be thought to be?

        Well, everyone who does buy their first home is effectively paying a “tax” like this, only it is not going to the government and it is not being used to pay for infrastructure. If it was, it would actually be preferable to the status quo…..because the young would actually see something useful getting done with their money.

      • Not entirely true PB. Things like making sure that renters are well protected, and that tax settings don’t favour speculation, are all parts of the puzzle. Having policy to manage where loose credit goes to etc.

        Merely boosting supply doesn’t always outrun credit in the short term – there are more beach units at surfers paradise than anyone needs but the irrational behaviour in the boom meant speculation ran miles ahead of true demand.

        That doesn’t mean that supply is not a key issue – UE and your comments have made a brutally strong case for that.

      • True, I have made longer comments covering these angles in the past. I would just say that “supply” HAS to be PART of any solution. None of the other “solutions” would work without “supply”, even if all of them were enacted except “supply”.

        But “supply” along with one or more other policy tools, would work. By “work”, I mean enabling “home ownership” and constraining a mortgage debt based bubble.

        My pick would be land taxes along with the liberalisation of supply of land. You would hardly need anything else. The problems that LVR’s and rent control and tax treatment of property investments and so on, are designed to address; would not exist.

      • Merely boosting supply doesn’t always outrun credit in the short term

        Who cares? The so-called problem you refer to does not result in any innocent parties being hurt.

        It is not “merely boosting supply” it is about building sufficent shelter. Get it?

        Speculators will always be with us. The question is, after a boom and bust, do you want there to be enough housing or not?

      • Yes – because speculative property booms don’t root up the environment, urban amenity and result in a swathe of poorly built sh*t boxes.

        you’re living in fairy land.

      • root up the environment, urban amenity and result in a swathe of poorly built sh*t boxes.

        Just as I stated – no innocent parties are hurt.

      • AJ, I think it is a bit on the nose to defend “price only” (with housing undersupply) bubbles just because they are easier on “the environment”.

        I do regard a bubble with both oversupply and inflated prices as the worst of all worlds, as Ireland and Spain illustrate.

        But I think minimal harm is done by a bit of supply overshoot in a high-population-growth, stable-price market; as in Texas in the 1990’s and Georgia in the 2000’s. Prices go from “already affordable” to “even more affordable” with any losses of equity being small in amount; and the overhang of empty properties is filled pretty quick with a bit more in-migration and slightly earlier household formation.

        Do a quick calculation: what is more damaging to a housing market and its national economy: 5 million properties all bubbling in “value” by an average of $200,000 each; or 100,000 “too many” houses getting built at $150,000 each?

  2. Yet even during the peak in house prices in The Netherlands on a 1:1 comparison of a town house between Sydney and a compatible location there. A house in The Netherlands was still 50% of Sydney house prices and affordable on a single average wage. In sq. m. the Dutch house, insulated brick was also a close match.

    • Well spotted…..!

      The Dutch authorities actually have powers of compulsory acquisition to keep “planning gain” lower in fringe development. Nevertheless actual quantities “supplied” still matters – it has not been enough.

      The essential “problem” is that real urban incomes have risen substantially for several decades, and people do have the means to consume more space – if it is there for them to consume. If it is not, the competition for “space” is won by people with the highest income levels, and the space they DO secure ends up “crowding out” people on lower incomes.

      Mansions with large gardens and tennis courts and multiple garages are even more relatively expensive in NL and the UK than in affordable US cities, than ordinary family homes are. This is because higher income earners in NL and the UK are having to pay a lot more to buy their way out of the land rationing system. And the sacrifice of space is all made by people on lower incomes, even as the cost of that space rises even faster than their real incomes have.

  3. At the same time the UK brains trust has put together a property deal which tops up the deposit of anyone with a deposit of 5% to 20%. That’s a massive 120k pound tax payer guarantee for houses up 600k at interest free terms for 5 years. Ridiculous stuff given that many of UK banks are government owned after previous property related bailouts.
    Can they be this dumb, or do the know that without the ponzi fuel of further debt, it’s all over for property valuations and the pool of property wealth that they are keenly going to tax dive into?
    Property & Deposits = taxable assets for funding present and future government debts !

    • Yes – they can be this dumb and they will be. Society actually needs to protect itself from the politicians now.

      • AJ. Save us from the politicians, yes but in Cyprus the politicians might need saving when the ATM’s fail.

      • There needs to be an example set….a lynching of the politicians in Cyprus would be a hell of a wakeup call to those getting a little too cosy and fat off doing sweet bugger all in other countries.

      • I think the politicians might realise that the debt jubilee required to end this mess is going to be harder than they think.

        And if it involves taking peoples savings to pay the bills left by the banks and the speculators it will most definitely get messy. Deflation may actually be a preferred outcome after all?

      • It’s not just “taking people’s savings”, which actually hardly scratches the surface of the amount of money needed; it is “garnishing everyone’s incomes for the next 30 years” that is just plain wrong on all levels.

        Iceland seems to be likely to be back to normal far sooner than countries that prolong the agony and spread it onto a whole future generation’s-worth of innocent people.

  4. 25% of households with a mortgage is now underwater. Shocking!

    It wil happen in Oz as well, simply unsustainable. When it happens the crash in the NL will have driven prices well down and we can use our savings from high Aussie wages to buy over there and escape the pain here.

    P.S. The rental market is dysfunctional in that it doesn’t provide an incentive to move on… heavily subsidised.

  5. The 1998-2009 rise in mortgage-debt-to-GDP ratio occurred in almost every “advanced” economy except Germany. What caused such remarkable consensus?

    • You are absolutely correct; have you followed “thebubblebubble.com”?

      I say what has caused this is growth containment urban planning. This has been a worldwide mania. Previous decades were marked by a mania for building roads and automobile dependent suburbs. This actually created the first ever period in history where housing was affordable and stable in price.

      Everywhere there has not been genuinely competitive or rapid automobile based development, whether in the first world before the automobile, or in developing countries today, the median multiples for house prices are always 6 or more, even though houses are a lot smaller and lower quality.

      The Great Depression of the 1930’s was actually the last of many historical cycles of volatile urban land prices – the historical focus on share markets has made people forget this.

      We have failed to understand what caused median multiples to be 3, and stable, for so long in so many nations after 1945. The UK was the exception that proved the rule; they established growth containment urban planning in 1947 and have never had the affordable prices and the price stability that most other first world nations have. They can not be accused of having had irresponsible monetary policy or loose credit, either as each of their several price cycles since 1947 have occurred. South Korea is another nation where mortgage credit has consistently been the toughest in the world, yet they too have had volatile house prices (they copied the UK’s urban planning system).

      Germany and Switzerland are interesting in that they do have a more clever approach to urban fringe development, that has tended to keep prices more stable. (Refer “Bigger Better Faster More” by Oliver Hartwich and Alan Evans). But even now they show signs of starting to bubble, as speculators fleeing to perceived safety in these nations “property” are swamping the housing supply elasticity’s ability to cope.

      The one part of the world that remains absolutely immune to these bubbles, is 150 odd cities in the USA where the process of converting rural land to urban is SO “free market” that developers literally just form a new municipality and raise money for its infrastructure on bond markets, without any “central” urban planners forbidding them. This, and the totally free competition between developers doing it, “anchors” the price of houses in “the cost of rural land (i.e. approx $10,000 per acre) plus cost of development, infrastructure and buildings, plus a moderate profit. This means $30,000 quarter acre sections and good solid McMansions for $140,000.

      • Thanks Phil, very interesting information. Now I understand how we manage to have these advanced economy house prices despite abundant land and small population.

  6. The difference is that here many owners are speculators. In The Netherlands they are overwhelmingly owner occupiers.

    • It is interesting to note that the Netherlands is comparable to Australia for population yet its total land area is not much bigger than “Greater Sydney”.

      So for Australia’s urban planning system to engineer a crisis of housing unaffordability is an achievement indeed.

      • Note too that the Dutch diaspora is considerable, there are “Dutch communities” in nations all around the world. They actually do simply lack space back there in the NL. They barely have “food security”.

      • And people who think China and India’s problems are because they are “overpopulated”, need to note that half the countries in Europe are more densely populated, some very much more so. Especially the NL. There is no correlation between population density and economic outcomes.

  7. reusachtigeMEMBER

    Now this is one Dutch disease I hope we catch a severe case of. Lucky future generations!

  8. thomickersMEMBER

    Funny… when I toured Holland in 2007 and keen to study there, people were telling me at the time that it takes 2 years to get a rental place in Utrecht!

    Wonder how long it takes now…

    • Even longer. They’re referring to the Dutch equivalent of housing commission. Owing to the possibility to write off oo mortgage interest against tax but not for investments private rentals are about 30% higher than an equivalent mortgage.

  9. This comment about the Dutch housing market is not as scary as some other economies:

    “ridiculously easy credit, with a third of mortgages guaranteed by the government;”

    What about the U.S ? I believe the ratio is close to 80%-90% of all mortgages now being backed by the government (Fannie Mae and Freddie Mac).

    • I recommend “DrHousingBubble” for info on what the housing market in California is doing; and occasionally he comments about other parts of the USA.

      He is dead from the neck upwards about the role of housing “supply”; but he certainly spotlights the absurdities that are recurring AGAIN in California (speculation, excessively easy credit) as their house prices resume their next bubble cycle.

      The US Federal Government and its expert advisors are typical of the utter failure of the mainstream economics profession to elucidate the role of “planning gain” and economic land rent in housing market instability and chronic unaffordability. What is actually needed to prevent further episodes, is a Federal law requiring that any regional government that enacts strict planning controls on urban expansion, is also required to enact stiff land taxes on rezoned land; and if that fails to keep median multiples below 4, they are obliged to start compulsorily acquiring the rezoned land from gouging land owners whom they have gifted with monopoly powers.

      We would then see what would happen to the current “support” for urban growth containment policies…..! Isn’t it funny that the well funded and organised forces in favour of “conserving the environment” etc are so blind to the necessity of eliminating fat and immoral “monopoly rent” as part of the process, if there is not to be unintended consequences worse than “the problem”?

      F A Hayek was probably right about the kind of mind that is attracted to “planning” as a profession; it inevitably seems to also have a little-developed capacity for basic economics.