House-price fluctuations and the disfuctionality of the Dutch Housing market:exploding house prices versus falling housing production
Peter J. Boelhouwer
Home ownership is on the rise in Western Europe, and the Netherlands is a case in point. The share of this tenure in the Dutch housing market has increased over the past 30 years; from a mere 35% in 1970, it now accounts for 54% of the housing stock (Table 1). This tenure is not evenly distributed by income bracket, however. It is especially predominant among households with an above-modal income (67%). The lower half of the income distribution is mainly found in the rented sector (69%). Various housing-demand surveys document the widespread desire to own a home. Housing policy in the Netherlands is closely tied to this expressed demand. By building new owner-occupancy dwellings and selling off a hefty share of the social-rented stock, the government expects to raise the share of home ownership to 65% by 2010. Whereas the owner-occupancy sector has been growing in many other countries in Western Europe, house prices in the Netherlands have taken a different course.
Unlike other West-European countries, the Netherlands did not experience a recession at the end of the 1980s. In fact, in the 1990s there was an unprecedented price explosion in housing markets throughout the country (Ball and Grilli, 1997; Boelhouwer, 2000). A second key difference is the generous fiscal treatment of home ownership in the Netherlands. Almost all West European countries have either abolished the deduction of mortgage interest from taxable income (as in Germany and the United Kingdom) or severely curtailed it (as in the Scandinavian countries, France and Belgium).
The extremely modest Dutch imputed rent (0.8% of the valuation) in no way offsets the advantages of the unrestricted fiscal deduction of mortgage interest that Dutch owner occupiers enjoy. A third difference is the range of lending options offered by financial services to homebuyers in the Netherlands. A mortgage loan can amount to as much as 125% of a dwelling’s valuation, while financiers in most other European countries are not prepared to lend more than 70% to 80%, or occasionally 100% at the very most.
This generous financing, in combination with the mortgage interest deduction, makes a maximum mortgage an attractive proposition for many Dutch owner-occupiers, allowing them to use part of the loan to meet objectives unrelated to housing (purchase of stocks and shares, consumer goods, etc.). The Dutch Central Plan Bureau calculated that, in the period 1993-1999, a third of the growth in the purchase of consumer goods was financed by other means than through the growth of total available family income, while the Netherlands Bank estimated, on the basis of model calculations, that increases in house prices were responsible in the period 1996-1999 for about 0.4 percentage points of the average economic growth through direct and indirect effects on domestic expenditure. For 1999, this percentage would work out to about 0.6 to 0.7% (De Nederlandse Bank, 2000).
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House prices have gone up 200% in the Netherlands in the last 10 years, but sentiment is that it does not represent a housing bubble, but instead reflects a shortage of avalailable houses. However, there seem many similarities with the US and I myself doubt whether there is a real shortage.
House prices do not correlate with demand, but with interest rates and creative mortgaging. Banks have been extremely easy in lending high amounts of money, 6 times annual income and more than 100% is possible, all due to low rents and exotic mortgages. People think they always win, because in a couple of years the house in worth a lot more and we just refinance.
I begin to think that demand is not due to a real demand for an affordable roof, but due to a demand of more luxury, based on the overvalue for people that already own a home, and the consensus that buying a house is always good and renting is loosing money.
Where I live in Amsterdam, the monthly expenses people would pay if they buy a house are more than twice as high as the rent for similar rental houses. It seems a much better investment if you invest the difference (> 12.000 annually) at 5%.
I was also quite amazed when the builders started complaining recently that they couldn't sell the apartments any more, and wanted to build single-family homes. So apparently, there is saturation in apartments. The need for building more houses seems to come especially from the builders and the estate agents.
People should realize that it is speculating for house prices to go up. I see a lot of people who used their added value to move to a bigger house in the last couple of years. So in fact, they leveraged their investment until a point where all their money is in the house, so that when the house is sold with a 10% loss, they would owe a year-income in debt.
The role of the government is also dubious. There is a 6% tax on the sale of an existing house, so higher house prices means more tx income for the government. Since other local taxes are also related to value of the house, local taxes have gone up tremendously.
Let's see
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