Dutch economic crisis worsens

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By Leith van Onselen

Over the past few months, I have posted a number of articles on the worsening economic situation facing the Netherlands economy (see here, here, and here).

The catalyst for the downturn in the Netherlands economy is the housing correction, which has seen house prices fall by -6% in the year to March 2013 to be down around -18% since prices peaked in 2008 (see next chart).

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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’ household debt is amongst the world’s highest, amounting to over 260% of disposable incomes in 2011 (see next chart).

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Accordingly, the house price correction has pulled many highly-indebted Dutch households into negative equity. In the process, consumer confidence and spending have declined sharply (see next chart).

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And the Netherlands economy is contracting, down -1.2% over the past year (see next chart).

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Meanwhile, the release of labour force data a fortnight ago showed 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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An article published overnight in The Telegraph provides additional insight into the Netherlands’ economic crisis, painting a picture of a post-housing bubble economy hamstrung by the loss of currency controls and monetary policy, courtesy of its ties to the Euro:

The Netherlands offers a salutary lesson of what can happen to a rich sophisticated economy caught in a post-bubble crunch once it has lost control of its currency, central bank and monetary levers. This would have happened to Britain without the Bank of England, and the US without the Fed…

“The Netherlands bears striking resemblance to Spain and Ireland two or so years ago,” says Stephen Jen from SLJ Macro Partners. Holland has a fat current account surplus of 8.3pc of GDP and a savings rate of 26pc, but Mr Jen says such “virtues” did not prevent Japan succumbing to the after-shocks of its housing crash.

Holland’s errors were made long ago when tax policy and regulation combined to produced a housing bubble to match Britain’s follies under Gordon Brown.

As in Britain – or Japan when it buckled in 1990 – there is a long-term housing shortage. Rabobank says the overhang of unsold homes is 228,000. That is bad but not disastrous. The crisis stems from rampant credit, not rampant building.

Regulators let the average loan-to-value ratio of new mortgages soar to 120pc at the peak. Since mortgage interest is tax deductible, around 60pc of the entire stock of mortgages is interest-only.

Unlike the Bank of Spain, which tried to “lean against the wind”, Dutch officials saw no need for extra buffers to offset the (then) ultra-loose policies of the European Central Bank, geared to German needs when Germany was in slump. The ratio of household debt to disposable income peaked at 266pc in 2010, the highest in EMU and almost a world record.

The denoument is well under way. Dutch house prices have fallen 18pc, leaving a quarter of all mortgages “onder water”, and there is surely worse to come. Standard & Poor’s expects prices to drop 5.5pc this year, and slide again in 2014. This is infecting everything. “Consumer sentiment in the Netherlands is at much the same level now as at the depths of the global financial crisis,” said Ken Wattret, an analyst at BNP.

There has been little forced selling of property so far, which is lucky since Dutch banks are up to their necks in mortgage portfolios. They face a huge “funding gap”. The loan-deposit ratio (LTD) is 183pc, compared with roughly 70pc in the US and Japan, 100pc in Germany or 120pc in Britain.

This means that Dutch lenders – like Northern Rock before them – must rely on the capital markets to roll over debts. This is courting fate. “The persistently high LTD ratio makes Dutch banks particularly vulnerable to a scenario in which market confidence evaporates,” said the Nederlandsche Bank (DNB) in its latest stability report.

The sharp deterioration in the Dutch economy is now 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.

As argued previously, the Dutch are 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.

And their folly is being compounded by the Netherlands’ ties to the euro, which has placed control of key macroeconomic tools (namely the currency and interest rates) in the hands of the ECB, as well as austere fiscal policies pursued by the Dutch central government.

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Unconventional Economist


  1. reusachtigeMEMBER

    We seem to be getting Dutch Disease. How long before we can enjoy this strain?

    • Pretty soon, I think. But probably not for at least a few years, fortunately. Luckily for us, we still have low public debt levels (for now) that can blow out to Eurpoean levels with even more unsustainable spending. We have a very compliant politico-housing completed and our own currency to print when we need to deflate the horrendous debts we’ll incur. We have plenty of time to enjoy the ride before the true symptoms start to manifest themselves.

      • Abbott seems purely reactionary IMO so if there is a crisis, he will bail out the banks for sure. Of course, so would Labor.

        I do hope it doesn’t take that long. If something blew up in a non-reversible way, I don’t think multiplying our public debt by 10-20x would avoid a massive crunch.

        • It’s a given that the banking system’s debts are our debts, regardless of who’s in government at the time. You’ve only got to look at Ireland as the model. They went from public debt levels not much different to ours to well over 100% because their government took all of the banks’ liabilities onto the public balance sheet. I’d expect our government to do exactly the same thing. We’re on the hook for the lot.

          • +1 The message of the GFC/Great Recession was that:

            Private Debt Matters!!

            The punters should be very wary of being conned by politicians and economists with vested interests that the truth is otherwise.

          • Giordano Bruno

            I don’t agree with this it all.

            There is no doubt that the Australian government will have to maintaining confidence in our banks, however we are not part of a Union, we are not beholden to some foreign central government and we have let banks fail before. More than once.

            I think Australia would be much more similar to a US style situation where the backs were capitalised at their own cost to ensure they do not fail while they have to take the hit on their balance sheets along with their debtors and the taxpayer is left with minimal burden.

            What Ireland did sent them into a devastating economic malaise and there is no one on earth who would advise repeating that.

            We will NOT be doing the Irish jig in my opinion.

            Australia is in an excellent position with around 60% of our banks debt off shored (top of my head).

            Australia is in a fantastic position to speak free market riskenese and tell the foreign lenders what risk is in profit and loss.

            The reality is that it might well end up being Europe that takes even more of a hit – why not ? We don’t owe them anything except money, which is gone.

          • Pfh007MEMBER


            That’s the spirit !

            That is exactly what we should do with overseas lenders who luck out on punts on casear stone in Castlemaine.

            But I don’t share your confidence that we have pollies or regulators with the ram sized appendages to follow through.

            They will collapse in a heap and comply with the marching orders received from overseas.

            Pulling the pin on local banks that owe big to foreigners is just not going to happen. It would put too many junkets and clubby invites at risk for our tin pot jet set.

          • Giordano,
            when the deficit funding is essential to maintain GDP and fund the ongoing gov’t needs the pollies and banks become slaves of their lenders and their habits.

            Look at some of the ridiculous agreements signed by the Greek, Spanish and Irish govt’s. Neither the govt’s nor the bankers had any options other than to accept the modified loan agreements or see their economies completely collapse. The banks become like junkies who will sign anything to get their next line of capital. So existing agreements are irrelevant because they will be quickly replaced with less favorable agreements as soon a the credit worthiness of the banks slides. Iceland was different because it still had the fishing industry to fall back on, additionally the rise of the banking industry was a relatively recent phenomena in Iceland, so the working population could always fall back to their old occupations.

            Any CAS country can simply “flick-the-bird” at any creditor that makes outrageous demands, however a CAD country will collapse without the next line of crack (credit) so they agree to anything and press their pollies to underwrite these agreements.

  2. The sad thing is that any pro-growth policies will just be pro-easy-money and pro-property-growth policies.

    I am really curious what will happen when one of these nations actually goes broke one day. The shock to welfare will be epic. I am not anti-welfare at all, but it should be sustainable and smart, something most welfare policies in the world lack.

    • “The sad thing is that any pro-growth policies will just be pro-easy-money and pro-property-growth policies.”

      That’s exactly the problem. Pro IMMEDIATE growth policies MUSY re-inflate the bursting bubbles. You just end up with more debt and even more mis-allocation. As such all attempts at immediate growth (anti-austerity) make the LONG TERM prospects that much more difficult.

      For LONG TERM growth to be gained there is pain and dislocation.

      The answers lie back in time.

  3. It is getting really hard to resist the notion that Australia will find a way out of this via a significant reset of our currency. Something the Dutch cannot do.

    That million dollar pad is going to go from 1mil USD/TWI to 700 USD/TWI a wipe out of capital of 30% and most of unhedged australia will not even notice.

    And given that our key inflationary items are health and education it may not even really bite on the CPI.

    • The Netherlands offers a salutary lesson of what can happen to a rich sophisticated economy caught in a post-bubble crunch once it has lost control of its currency, central bank and monetary levers. This would have happened to Britain without the Bank of England, and the US without the Fed…

      The Fed and the BOE are not solving their problem. They are just kicking the can down the road and exacerbating a bad situation. That’s what your own currency allows you to do until you can’t.

    • And given that our key inflationary items are health and education it may not even really bite on the CPI.

      aj…it is going to blast the CPI like a rocket. It’s very simple maths. Measured CPI inflation is generally about 4 to 5% in non-tradables. It’s been about zero in tradables giving us our 2.5-2.75% inflation.
      Now hit your tradable data with a 20% decline in the currency. Follow that up with the seepage into the non-tradable sector.

      Our situation is damned scary….our own currency or not!!!!

  4. Thanks Leith, really enjoying the coverage of the Netherlands economy (and everything else you guys produce). On another note, I know you guys are busy and for every article you write you can’t write another, but I’m surprised we haven’t heard much from you on Canada in a while. They’ve had some bad data out of late, and given their parallels to Australia…

      • Isn’t it interesting that the Netherlands can have such a high mortgage to income ratio and yet maintain such an impressive current account surplus. I assume this points to significant compulsory retirement deductions subsequently invested overseas?