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Dutch pay the price for poor housing policy

Macro Business, 23 August 2012

In June last year, I published a detailed article,
entitled Dutch show how not to run housing policy, which argued that the
Netherlands housing system all but guarantees unaffordable housing and a
susceptibility to housing bubbles, via:

easy credit, with a third of mortgages guaranteed by the government;
interest tax relief and generous subsidies offered to home buyers;

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 it appears the chickens are coming home to roost,
with Dutch house price falls accelerating. According to the National Statistics
Agency, Dutch house prices fell -8% in the year to July to be down -15% since
prices peaked in 2008. Prices are now back at 2006 levels (see below chart).

Housing demand in the Netherlands is now falling. House
sales dropped by -3% year-on-year, with the decline in demand resulting from
falling household disposable income, low consumer confidence and rising
unemployment amid weak economic growth.

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, 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 reportedly contributing to the
downturn in household spending, which is exacerbating the the Netherlands’
current economic slowdown.

The outlook is not good either.

Earlier this year, the Dutch Central Bank forecast that
house prices would continue to drop through 2014 as stricter mortgage lending
rules and a reduction of the homeowner tax break takes effect. The Central Bank
also predicted that economic growth in the seven years through 2014 will be the
lowest since World War Two, which follows the European Commission’s recent
forecast that the Dutch economy would shrink by almost -1% this year.

Likewise, ING Group earlier this month forecast that
values could fall by another -5% next year, and expects one-in-four mortgaged
homes will exceed their value. ING’s forecast follows that of the Dutch Central
Bank, which last year projected that a -10% fall in home values would place 30%
of all mortgages into negative equity, leading to losses at the four Dutch
commercial banks, where about one third of lending comes from mortgages and
which are already reporting rising mortgage delinquencies.

Clearly, there is more pain
to come for the Dutch economy, which is now paying the price for years of poor
housing policy.