The Netherlands Underwater: from Boom to Bust

Alistair Helm

September 8, 2013

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The Dutch are suffering from the after-effects of a housing bubble.

This guest article is written by Joep Ketelaar who was the CEO of Funda between March 2008 and September 2013.

Image Search Of Holland - Google SearchThe Dutch invented the financial bubble: they brought us tulip mania in the 17th century. Hence it can be no surprise that another tale of boom and bust comes from the Netherlands. The Dutch property market had seen an unprecedented boom between 1992 and 2007, with property prices rising by 250% in real terms. So when it was hit by the financial crisis in 2008, it had further to fall than in neighbouring countries: in Germany, for example, prices had declined slightly in the same 15-year period up to 2007 and they have remained flat since then, while in the Netherlands prices declined by almost 25% since 2007. Transactions were down 50% in 2012 compared to boom year 2007, when more than 200 thousand homes were sold in the Netherlands. Experts suggest that prices still have further to fall before they are to go up again. The problems aren’t confined to the property market: the entire Dutch economy is suffering from the after-effects of the housing bubble, and there is no quick way out. Underlying is a dangerous cocktail of three interlocking problems.

Global House Prices_ Location, Location, Location | The Economist

First, the Netherlands have an oversized social housing structure. Almost all rental properties are social housing properties, forming approximately 35% of the entire housing stock, by far the largest percentage in Europe. 55% of properties are owner-occupied, leaving only 10% for free market rental properties. Even these are heavily regulated, with strong tenant protection, making it virtually impossible to get rid of a tenant. Plus, annual price increases are capped at inflation. The absence of a sizable free rental market puts a strain on society as it makes it much harder for people to start employment elsewhere: it hence reduces mobility and created a country where a lot of folks are stuck in a traffic jam twice a day, not moving home. It also leads to steep rental prices for those who can afford it and have no alternative. The Dutch capital, Amsterdam, leads the country with over 55% of social housing. Recently awarded second best city to visit by Lonely Planet, and the clear number one place-to-be in the Netherlands, Amsterdam is the poorest city in the country, thanks to its social housing policy. The current government, a coalition between the centre-right Liberals and the centre- left Socialists, is aware of the problem, and aims to reduce the social housing stock while growing the number of free market rental properties. It also aims to bring social housing rental prices closer to free market rates. However, this is no easy feat, given the large number of voters who depend on social housing.

Second, the Dutch fiscal system encourages borrowing, as mortgage interest payments are tax deductible. And why pay off your mortgage when prices can go only one way, up? Consequently, the Dutch top the list in any international comparison of residential mortgage debt, with over 100% of GDP in mortgage debt, more than twice as much as nearby Germany, France and Belgium. With property prices going the other way, more home owners have ‘underwater’ mortgages, a particularly apt term in the Netherlands where half the territory lies below sea level, meaning that the mortgage is larger than the free-market value of the property. While they could pay their monthly mortgage bills, the problem remained pretty invisible. Unfortunately unemployment has been rising rapidly, leading to more mortgage defaults. The government realises that the unequal treatment between renting and owning leads to unwanted effects and has launched some sensible modifications to the tax code, reducing tax benefits on interest payments over the duration of the mortgage. These changes were heavily criticised by home owners, arguably worsening the downturn. However, most experts agree that the modifications were long overdue, and already priced in. Even the minister for Housing, Stef Blok, long a staunch defender of the tax deductions, mused that “it had long been clear that action was needed”.

Third, the Dutch mortgage market is strongly concentrated, with the top three players controlling more than 70% of the market. Two of these top three players received state aid in 2008, effectively banning them from offering competitive rates. To make matters worse, foreign mortgage providers fled the market in 2008, fearing defaults. This is no surprise as the Dutch are used to borrowing up to 105% of the property value, whereas German mortgage providers aren’t used to paying any more than 70%. This cocktail led to very uncompetitive rates after 2008. The government aims to slowly lower the maximum amount home owners can borrow, teasing foreign mortgage providers to return, and reducing the risk to the system over time.

The Dutch need only look to the east, to neighbour Germany, to see the light. Problem is that it will take many years of stable policymaking, and hence stable government, to get the Dutch out of their social housing and off their addiction to debt, as overly rash action may send the economy in a nosedive. Yet, stable government is in short supply in the Netherlands, where the past five governments have not finished their term. Don’t hold your breath.

Alistair Helm

September 8, 2013

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