Dutch housing bust intensifies

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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.

Now the Dutch are paying the price for its bubbly housing policy, with home values continuing to decline. According to the National Statistics Agency, Dutch house prices fell by nearly 10% in the year to June 2013 to be down more than 20% since prices peaked in 2008. Nominal prices are now back at levels not seen since mid-2004 (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.

The key macroeconomic aggregates paint a nasty picture. The Dutch labour market continues to deteriorate, with Dutch unemployment increasing to 8.5% in June 2013, a level not seen since the 1980s, with job losses most accute in the building industry (see next chart).

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The jump in unemployment follows the ongoing contraction in the Dutch economy, whereby GDP has contracted by -1.8% over the past year (see next chart).

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A report published this week by Michael Taylor from Lombard Street Research shed further light on the Dutch housing bust, which is crippling its debt-ridden economy. From CNBC:

Surging house prices in the country have now given way to a “painful post-bubble adjustment”, Taylor said, similar to the adjustments in Spain and Ireland.

“The Dutch housing bubble was not caused in the main by inappropriately low interest rates following euro membership as occurred in Spain and Ireland. Instead generous tax relief on mortgages fueled a prolonged period of strong demand that pushed house prices to extreme levels”…

“Any revival in external demand will almost certainly not be strong enough to lift the economy out of recession”…

This is particularly bad news for the short-term consumer outlook, Taylor said, adding that this deleveraging by the household sector will exert a strong downward influence on consumption and the wider economy.

…consumer spending has been in an almost continuous decline for two years now. Household spending on goods and services was down 1.8 percent in May 2013 from May 2012, according to the latest data from Statistics Netherlands, with spending on durable goods falling dramatically.

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“The Netherlands is in the midst of a prolonged balance sheet recession. Output is likely to continue on a declining trend at least until house prices stabilize, but there is little prospect of this on a 12 to 18 month view,” Taylor said.

Clearly, there is more pain ahead for the Dutch economy, which continues to pay the price for years of poor housing policy.


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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.