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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Unconventional Economist
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  1. michael francis

    The Dutch should engage our boys from the REIV. I’m sure they could re-arrange the data and come up with a 10% gain.

  2. reusachtigeMEMBER

    Lucky people to be getting their housing reset. Push through the pain and enjoy some relief afterwards.

    • thomickersMEMBER

      “Push through the pain and enjoy some relief afterwards.”

      In the last tour de france there were a few Dutch cyclists who experienced this and placed well in the overall standings

    • Tiliqua scincoides

      “Push through the pain and enjoy some relief afterwards”.

      That’s what she said…

    • yes, the interest-only vehicles were pushed quite strongly as a savings vehicle; the money was supposed to be put into investment accounts that were supposed to produce decent yields, allowing you to pay off the loan.

  3. Leith, how do you think their mortgage tax relief compares with Negative Gearing in Aust and NZ?

    I know you have been pushing your land supply side argument mainly because everyone who wants a crash/correction wants to hear the fiscal supply argument, and I think it’s valid, particularly as a starting point for a bubble/overpricing, but I also think the role of investor and negative gearing sets us apart from places like London which also have supply issues but not nearly as much ‘investment’ property and stronger rules on borrowing for investors (they pay a higher rate of interest and capital gains).

    Do you think our own tax ‘breaks’ may make our ‘market’ equally unstable?

    • everyone who wants a crash/correction wants to hear the fiscal supply argument

      A) Greenies like to pretend that by getting govt to choke extra housing they can save the environment…
      (This limited supply makes some people miss-out and others pay-up)
      B) Do-gooders like to pretend that the problem is actually a shortage of dollars, not a shortage of houses. They like to pretend that govt can give grants of dollars to ensure all people can obtain good housing (without actually building more).
      C) Other know-it-all type people like to pretend that the problem is too many credit dollars, not a shortage of houses. They like to pretend that govt can choke-off the too-much credit and ensure all people can obtain good housing at a good price (without actually building more).
      D) The rarest person understands that both supply and demand of housing must be understood if all people are to obtain good housing at a good price.

      Is the message getting through?

      A) Choke supply
      B) Choke supply and stoke demand
      C) Choke supply and choke demand
      D) Do not choke supply. Do not choke or poke demand.

      • Cognitive Dissonance

        The Chinese have supply coming out the waazoo, but these poor saps cannot afford them……….what do you think the medicine is here ?

      • Just because an apartment is vacant, that doesn’t mean it is on the market and available for purchase.

        As I understand it they have a serious undersupply.

      • Cognitive Dissonance

        Thank you Peter but back to the question at hand.


        The Chinese have much supply, many for sale, many being built and many being discussed in the design offices.
        But un-affordability persists, how would you go about fixing this ?

      • The Chinese have much supply, many for sale, many being built …But un-affordability persists, how would you go about fixing this?

        If the Chinese employed me to solve their housing problem the first thing I would do would be to fly over to China and check out the situation for myself. I would try to obtain reliable data.
        Assuming what you say is true, then I would insist that all the property be auctioned over a 6 month period with no reserve. That would fix it.

  4. Now then; you are being a little bit
    disingenuous about this aas the following link shows http://ftalphaville.ft.com/2013/03/28/1441892/home-sweet-tax-shield-how-the-dutch-do-property/ .
    In particular the comment below indicates thatthe situation is dire, but not yet an apocalypse
    Besides the plan for National Mortgage Bonds already mentioned by Orca, which is expected to lower mortgage rates by around 0.5% as funding costs for the banks come down, there are a few other things to think about before deciding whether we’re all doomed.
    1) LTV is just one measure of risk on a mortgage. Affordability of repayments is at least as important. Most Dutch mortgages are fixed rate, tyically for 5 to 10 years. At the end of the fixed term, banks are legally obliged to offer borrowers a new deal. There is no automatic conversion to a variable rate. The most risky mortgages (i.e. those closed at the peak of the market in 2007 that will be the most underwater) are coming up for renewal in 2013 and 2014. Because swap rates are so much lower now than in 2007, banks are very often able to offer borrowers another 5-10y fixed deal at pretty much the same monthly cost but with vastly higher margins for the bank (2.5% versus less than 1% in 2007). These higher margins help cover the higher funding costs of the banks and the “increased risk” in these mortgages.
    2) There has been a significant pickup in “repayment” over the past 2 years from borrowers who find themselves under water on their mortgages. This is less visible than it would be elsewhere as the money goes into the savings and investment pots that people use to repay principal at maturity. But people who believe they may want to move house in the coming years are working to get their mortgages in balance with the vale of the home. In addition, banks are often able to consider other tax efficient savings as cover for the negative equity and the government has made it easier to let these savings be used as collateral.
    3) People will do almost anything to avoid defaulting on their mortgages or other loans. Once you are on the central database as a bad credit you never get access to credit again. In addition, banks are able to directly appropriate mortgage payments if arrears are significant, i.e. these payments are diverted from the borrower’s employer directly to the bank before the “bad borrower” see it in their bank account. The net result is tiny credit losses – 0.02% per annum over the cycle. Even if that goes up tenfold, the mortgage margin increase more than compensates for that.

    It’s fair to assume house prices will fall some more, turnover in the market has fallen off a cliff. But there is enough strength there to live through the trough. The new mortgage bonds, in which the state guarantees bonds backed by mortgages it has already guaranteed through the NHG scheme (for an additional fee of course), will cut funding costs, cut mortgage rates, and increase consumer confidence (which I think is the real problem in the Netherlands).