Housing bust plunges Dutch into economic crisis

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By Leith van Onselen

I have noted previously (here, here, and here), 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.

Dutch house prices have fallen sharply since the onset of the Global Financial Crisis (GFC). 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, with nominal prices now back at June 2005 levels (see next chart).

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And 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.

Last month, the Economist reported that the reduction in household wealth was contributing to the downturn in household spending, which is exacerbating the Netherlands’ current economic slowdown:

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 European Commission also 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 month, 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.

Yesterday, Spiegel Online provided possibly the most sobering assessment yet of the Dutch economy, which appears to be teetering on the edge of economic crisis similar to that experienced in the US:

“Underwater” is a good description of the crisis in a country where large parts of the territory are below sea level. Ironically, the Netherlands, once a model economy, now faces the kind of real estate crisis that has only affected the United States and Spain until now. Banks in the Netherlands have also pumped billions upon billions in loans into the private and commercial real estate market since the 1990s, without ensuring that borrowers had sufficient collateral.

Private homebuyers, for example, could easily find banks to finance more than 100 percent of a property’s price. “You could readily obtain a loan for five times your annual salary,” says Scheepens, “and all that without a cent of equity.” This was only possible because property owners were able to fully deduct mortgage interest from their taxes.

Instead of paying off the loans, borrowers normally put some of the money into an investment fund, month after month, hoping for a profit. The money was to be used eventually to pay off the loan, at least in part. But it quickly became customary to expect the value of a given property to increase substantially. Many Dutch savers expected that the resale of their homes would generate enough money to pay off the loans, along with a healthy profit…

No nation in the euro zone is as deeply in debt as the Netherlands, where banks have a total of about €650 billion in mortgage loans on their books. Consumer debt amounts to about 250 percent of available income. By comparison, in 2011 even the Spaniards only reached a debt ratio of 125 percent…

Many of the tightly calculated financing models are no longer working out, and citizens can hardly pay their debts anymore. The prices of commercial and private real estate, which were absurdly high for a time, are sinking dramatically. The once-booming economy is stalling…

Johannes Hers of the Centraal Planbureau in The Hague… expects a 0.5-percent decline in growth for 2013. Some 755 companies declared bankruptcy in February, the highest number since records began in 1981. The banking sector is also laying off thousands of employees at the moment.

Because of the many mortgage loans on the books, the financial industry is extremely inflated, so much so that the total assets of all banks are four-and-a-half times the size of economic output.

In February, the government was forced to nationalize SNS Bank, the country’s fourth-largest bank, because it had a large portfolio of bad loans for commercial real estate.

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. So why are we seeing house prices fall by 18% if land supply is so restrictive? Average house price growth over the 36 year period is around 4%pa. that’s pretty much in line with wages I would imagine. Seems like the correction they had to have.

    • I think it’s called a slow melt. Interest rates have been dropping since 2001 without significant increases in house prices since then. It would be interesting to overlay a chart of house price modified by interest rates of Oz and The Netherlands. The correlation should lag by approximately 10 – 15 years.

      • So over the past 12 months approvals are running at around 155K. What’s restrictive about that? Underlying demand currently sits at 131,000 (based on 8.75M households and 1.5% pop growth) whack on about 25K for demolitions and we are bang on!(perhaps a few thousand wont be completed tho).

        The relationship between housing supply and price is very tricky to work out. The data is really not good enough to support quality econometric analysis and charts are unlikely to pull apart the complex nature of the relationship. I do find it intriguing that as soon as one whacks on a great big FHB grant we all of sudden get 180K BA’s – seems it can happen pretty easily when people want to buy new stock.

      • Look at the escalation of fringe land prices over the past decade or so and tell me with a straight face that we don’t have a supply issue?

        Also, we are building the same number of homes as the early-1980s, despite prices being much higher and the population growing far more strongly. And you suggest our supply system is responsive?????

      • the escalation in house prices (land) mostly occurred in the early 2000s. Melb and Perth lagged and Syd was early. At the time NSW was completing 40-50K houses a year – well beyond UD. I suspect it’s more of a demand spike with households getting very excited about housing, low interest rates and potential cap gains. Adding a few more houses on the outskirts would not have pulled this back. Yes – supply matters but it’s not everything!

        We are building around 8% more houses on an ABS trend basis relative to early 1980s. Pop growth until about 2006 was very benign so the price escalation pre-dated the pop growth. Addmittedly UD has outstripped supply since 2006 – although the price response has been in line with incomes since that point. One could show that in times previous to 2006 we were building more houses than we needed. Housing has become a superior good in Australia.

        To claim that housing affordability problems are driven by restrictive supply one needs to explain why the major shift up in house prices occurred in 2000-2005 which was a point where there was strong building.

      • A couple of interesting case studies are Melb and Canb. both have experienced very strong building over the last 5 years – well beyond population growth. This growth has been a combination of inner city units and urban fringe development and masses of it! Neither are experiencing any improvement in house or land prices – they continue to follow the national trends.

        Traditionally Canb/Melb produce around 1.5/30K per year – recent years have been 5/60K.

      • So over the past 12 months approvals are running at around 155K. What’s restrictive about that? Underlying demand currently sits at 131,000 (based on 8.75M households and 1.5% pop growth) whack on about 25K for demolitions and we are bang on!(perhaps a few thousand wont be completed tho).

        This is flimsy rubbish you are posting. Even if enough extra was built in the last year, it says nothing of the pre-existing shortage. Just look at price and look at rents.

      • One can do such an analysis quite easily and one would find that supply > demand between 2001 to 2006 and then reverse thereafter. Currently appears in balance. Rents have risen in line with incomes and house prices rose vastly beyond incomes between 01 and 06 (when supply was strong). Since 06 house prices in line with incomes.

    • So why are we seeing house prices fall by 18% if land supply is so restrictive?

      Why not? You seem to believe that these two cannot co-exist. Explain your belief and I will explain the error in it.

    • Incomes.
      It’s always incomes.

      You can’t pay a 500k house off on 40k/annum. It’s that simple.

      Similarly, you can’t buy a new house when you’re about to retire!

    • They’re concerned, but not so concerned that they aren’t prepared to give it a go. In fact, they seem to be positively encouraging a bit of house price inflation while crossing their fingers and toes that it doesn’t get out of hand. Like the MB bloggers, Capt’ Glenn and the RBA realise that beyond the mining boom, there’s little else to the Australian economy other than flipping overpriced houses.

  2. The Netherlands is a mortgage basketcase. Luckily they have the best pension system world wide. Being acquainted with dutch politics, I can assure you that they didn’t see this one coming, although it was the elephant in the living room. Unfortunately Australia is sitting in the same boat. You should have listened more carefully to your wonderful professor from Sydney, Steve Keen. He has been warning for a real estate bubble in Australia for years now. Furthermore he predicted and motivated the financial crash in the developed world well before 2007. Readers from the Netherlands who are interested in background information regarding the euro, the fiancial and monetary crisis are advised to visit: http://www.economie-macht-maatschappij.com/index.html