Holland and the bubble dilemma

the price of housing. Neither immigration, nor the survival of the euro nor the color of the government that comes out of the polls in September are as worrying to the Dutch as the situation of its real estate market. Particularly for those who bought a house thinking that they could always resell it – at least! – for their original purchase price and now they find that they have “a mortgage under water”, that is, a home mortgaged for a price original higher than the purchase price.

bankers and owners do not agree in their diagnosis on

bankers and owners do not agree in their diagnosis on

the situation of the housing market. But after four years of almost uninterrupted price fall, everyone begins to worry about the extent of their ills. Delta Lloyd Bank has been the first entity to publicly say that the Dutch property market is dangerous, after the Parliament approved some timid but contested measures to try to cool it down, but without putting it out … Here is the dilemma it faces. Holland.

Go ahead with some data to understand why various international organizations describe the Dutch real estate sector as peculiar or, directly, eccentric. The Dutch are among the richest and most saving citizens in Europe, with assets equivalent to 280% of their GDP. However, it is in the Netherlands – and not in Spain, Ireland or Portugal – where the most indebted households in Europe are located. Its debt is equivalent to 250% of its GDP, compared to 206% in Ireland, 127.8% in Spain or the modest 88.9% in Germany (Eurostat, 2010 data).

The explanation for the high indebtedness of Dutch households is found in the policy of stimulating the purchase of housing, as opposed to the rental option, launched at the end of the 1990s. That is when a state guarantee was created (NHG, for example). , Nationale Hypotheekgarantie) that is activated if the owner, due to certain circumstances (unemployment, divorce, incapacity for work …) is forced to sell his house below the original price. In that case, it is the State, ultimately, who pays the outstanding debt with the bank. If at first this protection was accepted by 30% of the buyers, now it affects 80% of the acquisitions, partly because the banks push the client to request it. An ideal system for the consumer with limited cost for public finances in times of prosperity but dangerous – it is warned now – if things go wrong.

Another rarity of the Dutch market is its mortgages. The most popular ones are free of amortization (aflossingsvrije hypotheken) and allow not to amortize capital in the 30 years that the loan usually lasts. During that time, only 50% of the requested money is paid, which encourages consumers to borrow much higher than they could otherwise afford. In parallel to the mortgage, they usually contract savings accounts linked to investment funds, with the idea that after 30 years they have accumulated sufficient funds and benefits to settle the outstanding debt with the bank (all the capital loaned).

This model has been generously encouraged by the Dutch State

This model has been generously encouraged by the Dutch State

which offers tax breaks of up to 52% (the equivalent of the type of income tax that is paid, which favors the highest rents) on the interest that is paid. And immediately: the bank discounts them in the morning, and in the afternoon the State reimburses them, hence the ease of individuals to assume high debts. The tax advantage of mortgages is in fact greater than that foreseen to stimulate savings, with a tariff reduction of 30%. These deductions explain the strange combination that is currently seen in the Netherlands, Sweden or Denmark: their households have a high rate of private savings but they are also the most indebted.

The stimulus plan worked and the percentage of property ownership went from 42% in 1980 to 55% in 2005 and 60% currently. But the side effect of this policy has been a sudden and sharp rise in prices (an average of 80% between 1996 and 2001) that came to a halt in 2008, when prices suddenly fell by 5.3%. The following year the fall moderated (-1.5%) and in 2010 they recovered slightly (1%) thanks to the stimulus measures put in place by the Government. Last year, the Netherlands closed in recession, the fall in prices was 3.8% and this year is expected to reach 5%. The Bank of the Netherlands believes that prices will continue to fall.

A situation, in short, in which many owners and potential buyers begin to see the dangerous over-indebtedness to acquire a home that may have to sell below cost. According to the Dutch Central Bureau of Statistics (CBS), 500,000 Dutch houses currently have a value lower than the purchase price (they are called “underwater mortgages”).

“The housing market is the main problem of the Dutch economy, I think it poses a risk to its financial stability,” says Lans Bovenberg, professor of economics at the University of Tilburg and co-author of a plan signed by a score of experts who In February, he urged the Government to reform the sector, with an eye on the measures adopted a few years ago in Denmark, where they faced very similar problems. “I think we are first of all a debt bubble. Banks have a large financing gap and since the credit crunch of 2007 it is more difficult to obtain funds from the market, “says Bovenberg.

After losing the parliamentary majority, the coalition between conservatives and liberals was forced to agree the budget with the opposition, which led him to admit some reforms: give tax deductions only to mortgages that also amortize capital, prohibit the financing of costs to buy the home, put a cap on the loan at 100% of its value and not at 125%, as in good times … “To buy a house, we will have to save again”, summarized a few weeks ago the newspaper Of Volkskrant .

The reaction of the Dutch public opinion has not been positive.

The reaction of the Dutch public opinion has not been positive.

In Bovenberg’s view, the reforms recently approved by the Government do not attack the root of the problem but, on the contrary, can make it worse. “They lead to a price fall too fast, because the new owners will not be able to afford houses as expensive as they are now. I am afraid that prices, instead of falling by 5 or 10% more, which would be sustainable, can fall an additional 20% “. This will make bank financing more difficult and expensive, he warns, and it can have consequences for the real economy.

Bovenberg does not believe that the state guarantee of mortgages could become a problem for public finances. “First of all, because Dutch households are very disciplined and pay their mortgages, we have one of the lowest delinquency rates in Europe. And secondly because unemployment is still quite low, 5%. ” But with a 20% drop in prices as estimated by the reform approved by the Government, he points out, this could increase unemployment and delinquency.

Edward Feitsma, counselor of the Dutch Banking Federation, makes a less severe diagnosis of the situation in the sector. “I’m not saying there are no clouds on the horizon. There is a problem of falling prices, but more gradual than in Spain, Ireland or the United States. There may be a growing number of people who will not be able to pay their mortgage in the next few years, but here there is a national system of guarantees for those cases, “he says.

The financing problems of the entities have increased, he says, hence the deleveraging is more attractive and lends less than before. What the sector did ask for, and is grateful that it was approved, was a reform of the tax deduction model, since “you have to give incentives to people to amortize capital for the duration of the mortgage and do not leave everything to the end”. The least positive part of the reform, says Feitsma, is that it affects only new buyers.

Another fact that makes some think that the fall in prices is only a temporary correction, the result of the current economic uncertainty, is that in Holland “there is still housing shortage, contrary to what happens in Spain or Ireland. Here the offer is very limited, so we do not expect a dramatic drop in prices. “

The priority of the plan launched in February by 22 prominent economists is to reform the model of deductions so that it is no longer possible to deduct the interests of a mortgage that save and encourage the amortization of capital, as Denmark did a few years ago when faced with a problem Similary. Next, they propose, measures should be taken so that banks can take advantage of the high savings rate of their clients, funds that go out of the country.

The rental market is one of the areas where economists

The rental market is one of the areas where economists

ask to act because it is currently very regulated, there are long waiting lists and little mobility, which pushes young people to buy a home before they have even saved, so they ask liberalize it more. In addition, the space in the Netherlands is a real luxury: urban laws are very strict and there are many limits to the use of land.

The owner organization Eigen Huis (Own House), for its part, rejects repeated warnings from organizations such as the OECD or the IMF about the situation of the Dutch real estate sector and its banking ramifications. “They give a distorted picture of reality,” says its director, Rob Mulder. “They are based on very simple criteria, such as household debt in relation to GDP. They should look at other things, like the high savings rate. Or that it is a very safe market thanks to the state guarantee “.

In addition, the Dutch population continues to grow, households are getting smaller, the rental market works poorly (it is highly regulated and waiting lists are saturated) and very little is currently being built, so there is more demand than supply, the representative of this owners organization. “We still need 500,000 extra houses so that each household has one property,” Mulder calculates, crossing his fingers so that the new government reverses the reforms adopted and no longer depressed a market that is already in recession.