Op-Ed: Dutch Housing Market Next Bubble to Deflate?
Stocks like ING, Aegon may face mounting risk.
Editor's Note: Minyan Ernst is a Dutch business analyst currently assigned to a global bank with its base in the Netherlands.
The party's over
It's time to call it a day.
They've burst your pretty balloon.
And taken the moon away...
-Nat King Cole
The Netherlands is a small country with a relatively large and wealthy population of 16-plus million inhabitants. The number of inhabitants per square mile is among the highest in the world, and the population increased from 14 million in 1980 to 16.5 million in 2008.
The scarcity of single-family dwellings and condos for this growing population of families and single-person households provided steadily increasing demand and steadily rising housing prices until the mid-1990s. From 1995 on, however, the prices of houses began to increase at a much faster pace, caused by the accelerated growth rate of the population, the growing number of single-person households and the declining interest rates. The second graph shows that an average house purchased for $100,000 in 1995 would have had a value of $278,000 in 2008, due to the growing housing demand and the capacious availability of cheap money.
Interest Development Since 1979
Click to enlarge
Click to enlarge
Although the accelerated price development over the last 13 years can be explained, it should be a source of increasing concern, due to a number of reasons:
1. (Inter)national banks and mortgage suppliers like the Bank of Scotland (RBS), GMAC (GM), ING (ING), Rabobank and Aegon (AEG) allowed people to borrow up to 5-6 times their annual income on a mortgage against very competitive prices, as the interest rate was very low and risk seemed to be virtually non-existent.
Some maverick banks even lent up to 9 times the annual income.
2. Many people used the opportunity of the "peak mortgage" - a special form of mortgage where a person borrows 120% of the execution value of the house to cover for transfer costs and taxes. The fact that buyers of houses started "underwater" didn't bother most of them, as long as housing prices kept rising and interest rates stayed low.
3. The housing prices got extra leverage due to the income tax deductibility of the interest on mortgages in the Netherlands. This rebate delivers a total national tax break of $15 billion - approximately 8.3% of the national tax income of $180 billion.
Besides causing extra leverage on housing prices, the tax break makes it very attractive --especially in times of cheap credit -- to maintain the full mortgage amount for the whole duration of the mortgage (mostly 30 years), instead of paying off the home loan: the redemption-free mortgage.
A simplified example: A person who earns 100,000 EUR per year, owns a mortgage of 450,000 EUR on his home, that bears 4.5% of interest. There are segregated tax rates of 30%, 40% and 50% of the taxable income.
In this case, the holder of the mortgage pays only 2.25% of interest on his mortgage for the whole fixed interest period. And during the whole maturing time of the mortgage, half of the interest paid can be deducted from income taxes. In the meantime, or at the end of the 30 years, the mortgage sum could (in theory) be repaid by:
- a special savings/investment account in combination with a life-insurance policy connected to the mortgage;
taking a new (higher) mortgage on the house, while repaying the old mortgage;
selling the house (for a higher price) to repay the mortgage.
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