Dutch jobs go as house prices fall

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By Leith van Onselen

Earlier this month, I posted on how the Netherlands was facing a potential economic crisis on the back a severe housing correction, whereby house prices fell by -8% in the year to December 2012 to be down -18% since prices peaked in 2008, pulling many Dutch households into negative equity (see next chart).

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The release of labour force data overnight suggested the Netherlands’ economy has deteriorated further, with Dutch unemployment increasing to 8.1%, a level not seen since the 1980s, with job losses most accute in the building industry (see next chart).

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The Netherlands’ Central Bureau for Statistics said the increase in unemployment had been sharpest among 25 to 45-year-olds. Job losses have been concentrated in domestic industries, including the building trade, which has been hit hard by a falling housing market.

The jump in unemployment follows the contraction in the Dutch economy, whereby GDP has contracted by -1.2% over the past year (see next chart).

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The sharp deterioration in the Dutch economy is placing pressure on the central government to abandon austerity measures, which it has pursued for the best part of two years and is partly responsible for the contraction in demand. According to the Financial Times:

When Amsterdam began implementing austerity measures two years ago, the Netherlands had the lowest jobless level… Employers engaged in so-called “labour hoarding” after the global financial crisis of 2008, and were reluctant to fire workers in the expectation of a rapid return to economic growth.

At that time forecasters were surprised by the low levels of unemployment, which did not rise as fast as extrapolations from the fall in economic activity would have predicted.

As the euro crisis and economic slowdown have dragged into years, labour hoarding has disappeared and unemployment has risen steadily. With bankruptcies also reaching record levels in February, employers no longer feel confident they can hold on to workers.

The pace of the rise in unemployment now seems to be exceeding expectations.

As I noted last time, the Dutch are now paying the price for years of poor housing policy, including:

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

There are lessons here for all economies.

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Unconventional Economist
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  1. Our economy has several differences with the Dutch one, of course.

    But if you look at the first graph and chop the last 18 months off it – it sure looks like the Australian graph!

    Lucky we’re immune to anything bad ever happening…

  2. russellsmith55

    Sounds like a dutch disease we’d want to catch. Give them another few years or two to clean out all the useless debt and efficiently reallocate their capital, and they’ll be ready to surge back to growth long before we ever will.

    • Perhaps Gillard could win the election if such wondrous deflation was their core #1 everything else comes second policy.

  3. ‘The sharp deterioration in the Dutch economy is placing pressure on the central government to abandon austerity measures, which it has pursued for the best part of two years and is partly responsible for the contraction in demand.’
    Gosh, who could have predicted this. Just about anyone with any cents!

    • “Austerity measures”:

      Reducing government spending as a percentage of GDP, to pre-2000 record levels, after several years of mindless profligacy with bubble revenues.

  4. Arthur Schopenhauer

    Looks like a template for Victoria.

    1. The citizens hit their debt ceiling.
    2. Mortgage debt growth slows
    3. The economy adjusts with employers tightening budgets and reducing working hours of employees.
    4. Employees become more debt averse and mortgage growth closes in on 0%.
    5. Houses prices adjust, slightly down.
    6. Government income is reduced as economy contracts. They launch austerity programs.
    7. Inflated construction/real estate sector down sizes.
    8. Unemployment snowballs.
    9. Those who cannot service debt in the new “austere” economy unload property. House prices drop.
    10. Cue MSM, pollies and banks saying, “Who could of seen this coming?”

    Crikey, it’s not rocket science.


    • Yes, indeed. I like number 10. The only people who wouldn’t have seen it coming are those that weren’t looking.

    • The problem with government spending in all this, is that it was “pro cyclical”.

      REAL “Keynesianism” is just as much “salting it away in the boom years” as it is “deficit spending in the lean years”.

      I doubt the concept has any relevance to the appalling bind we are now in. There has to be such a thing as “so much debt you can’t get out of it by borrowing yet more to hopefully invest in things that will restore a revenue stream”. This is how businesses end up way over their heads – like a small business owner I know who ran up $2 million in underwater borrowing since his cash flow went negative on a roughly $1 million per annum turnover in mid 2008. He never did get the cash flow positive again all that time in spite of all the borrowing.

      He could have admitted he was bankrupt when his debt hit about $300,000 in early 2009. I suppose once you’re bankrupt, you’re bankrupt, and it is up to your lenders to see the light and cut their losses and run.

    • rob barrattMEMBER

      Greed always triumphs over caution, at least until the negive feetback phase really kicks in.

  5. Leith, should the Netherlands abandon austerity and what actions would you recommend to the Dutch government?

    • Well, they’re in a bind, aren’t they? People don’t want to spend because their house is worth less and governments are making less money because people are spending less because their house is worth less.
      Further austerity will only make that cycle worse. Not saying that they shouldn’t go for austerity. Just that when your economy is dependent on selling houses to each other, leading to increasing house prices and therefore increasing consumption and tax revenue, it’s pretty tough when the house price rises go into reverse.

    • Arthur Schopenhauer

      The dutch have to get the mortgage debt out of the system before there is enough capital available for new productive industries.

      Austerity is probably not going to help the citizenry reduce their mortgage debt.

    • Does the Netherlands have the option to abandon austerity so long as it is bound by the Maastricht treaty?

      • There is such a thing as being in a debt hole so deep that continued running up of debt is no longer an option to get out of the hole.

        It is also faintly absurd to hear all this talk of “austerity” when government spending is still in excess of levels that prior to about 2000, would have been regarded as an all-time record high. Sure they have been higher in the meantime, but that was in “too good to be true” times.

  6. Did you get my email about the recent report by a Commission of Inquiry regarding 20 years of increasing property prices Leith?

    • I am keen to know more – you mean in the NL?

      I know that the NL has long had government agencies responsible for tracking housing affordability and using “supply” to combat it – and they compulsorily acquire rural land for growth, to eliminate “planning gain”.

      So I have for a while, badly been wanting to know “what went wrong” in the NL. I believe that economists like Wouter Vermeulen and Jos Van Ommeren and Jan Rouwendal have been arguing all along that the “supply” has been inadequate.

      • Results were published on a site recently so I sent Leith a translation. Figured it make for a decent post. Haven’t had confirmation he received it though.

  7. Pretty good reason of why the RBA, Government etc al are shit scared of house price deflation.

  8. From Tyler Cowen, on Europe:

    “Trying “austerity” will hasten the fall, but at the same time it is hard to see how an economy contracting by 15% could in the longer run keep its previous level of government spending, or for that matter find a “good” time to do fiscal consolidation. It will appear that “austerity” is more causally important than it really is.

    All sorts of particular stories will get told along the way, including the austerity story. Those stories may look true, but ultimately they are more about timing and trajectory than about fundamental causes. What I call “time compression” will very often appear to be causality.

    A lot of the problems caused by fiscal consolidation are in fact “sectoral shift” problems. For instance cuts in government spending lay off workers and the Mediterranean private sector — in the midst of a significant contraction and somewhat inflexible to begin with — is unlikely to rehire those workers. The fiscal policy advocates actually have an argument against their “let monetary policy do all the work” critics, although their obsession with AD prevents them from emphasizing the sectoral shift aspects of the fiscal story, which are in fact the paramount aspects.”

      • Excellent, that is similar to what I am saying about govt spending levels. This “austerity”, in terms of its actual spending levels, would not have been called “austerity” at all prior to about 2000 – it would have been called “all time record profligacy”.

        I am tempted to liken this situation to a family that borrowed heavily to live a lavish lifestyle 2000-2009, and meanwhile their actual income from the family business has shrunk and they are having trouble even servicing the interest on their debt.

        Now they are crying “austerity” because their nasty creditors want them to at least revert to their pre-2000 lifestyle, even though they are still not paying back debt thereby; and they are crying that if only they had the chance to keep borrowing and spending, they will be able to restore the income levels their family business used to achieve.

        Now, there might be some validity in this if they were talking about, say, investing the new borrowing in physical capital to make their family business more productive. In the context of the nation, this means re-growing the tradables sector. This would be “self liquidating debt”. But most of the talk is NOT about re-growing the tradables sector – it is about maintaining the same level of government spending on pure “consumption” of wealth. Not “self liquidating” debt at all.

        And how much of the economic response to this ongoing “stimulus”, in terms of private sector investment in capital for which the debt IS self-liquidating, is “malinvestment” anyway?

        This is a moral issue. “Prudence” is out of fashion, so “Victorian”, my dear – the positions taken in this argument are being labelled “harsh, austere and uncaring”, versus “compassionate, liberal and positive”.

  9. I am changing my thinking about a crash versus a slow deflate. The more I ponder on it the more I feel now that a sudden crash and detox may have been better, even with the flow on initially to the broader economy, than the pain of a slow deflate.

    If we had a sudden detox/crash I doubt that our construction industry, retail, manufacturing and tourism would be in as bad a shape as they are now.

    Just saying….

    • I agree,

      The big difference between now and the 1930s – which is the bogeyman that gets waved whenever someone talks about allowing allowing debts that cannot be paid to default – is that we have the ability to ease the adjustment via the welfare system and via the nationalisation of banks that fail.

      Sure life is not going to be fun for those who default (or invested in the loans that defaulted) but there is, as we are now starting to appreciate, a huge cost in trying to prevent bad investments being called to account.

      Bad loans are simply that – bad loans.

      Pretending otherwise is the real problem.

  10. May be in order to decide what the Dutch can or can’t do might require a bit more examination.
    On the face of it the Dutch could indulge in increased Govt spending with all the caveats re productive spending etc. It runs, and has run, a significant CAS so it is apparently in no danger on the external account front. However its trade surplus is mainly with other Eurozone countries so as the results of the debt cycle bite in other EZ economies this could have, and given the unemployment numbers, is having a marked effect on the economy. Again it requires a much closer analysis.

    One way or another the Dutch look in a better position to adjust to a new reality than many others. Of course it still may not be pretty.

    France is the real problem.

  11. P.S. and Yes the Dutch are constrained by the Maastricht treaty. Given that most others have not felt too constrained by the treaty it’s hard to see why the Dutch should be.

  12. How about this for a suggestion for responsible management of government finances: government can go into deficit at any time if the additional spending is for infrastructure that cost benefit analysis shows would clearly boost national income by more than three times the up front cost (this means that eventually increased revenue would accrue to the government roughly matching the outlay). Aside from that, a national target for average unemployment over an economic cycle should be set. If unemployment is above the target, government can go into deficit, with preference given to spending measures that meet the first criterion above. Below the target, surpluses should be generated to be put aside in a sovereign wealth fund. Drawdowns from the sovereign wealth fund count as deficits. The adherence to these rules would need to be monitored by an “honest broker” body not under the direct control of the ruling party.

    The result would be that politicians could only promise to deliver something by either taking something else away or by raising taxes. We might finally learn that there is no magic pudding, no cargo about to arrive by magic. What we want from government, we have to be prepared to pay for.

    In this scenario, I envisage that central bank setting of interest rates would be unnecessary. More sensible to focus on prudential rules for banks, eg maximum LVRs. Not to mention minimising restrictions on land development.

  13. Its all about the employment figures.

    Australian real estate is going to be in a world of pain when unemployment hits 7.5%

    If we get to 8.1%, like NL, all the wallets in this country will close up faster and tighter than a deep sea clam.

    • Quite right

      Not to mention the flow-on effects.

      Unfortunately I see a generation of wannabe-retirees trying to re-enter the workforce to meet the deficit left by an underfunded welfare system and leveraged investment properties that didn’t quite go as well as the said it would

    • If the participation rate had remained unchanged, then we would already be at 6.2%…

      • That’s what gets me about “statistics to suit”. The Participation Rate….how about plain and simple “this is the number of people who don’t have a job/this is the number of people who are of working age” How can we compare historical unemployment rates with today when 50% of the working age population in the pre 70’s didn’t participate because the absence of the Pill meant they were ‘not participating’ and at home, rearing children!