Dutch parties face mortgage mountain

Posted on September 19, 2012

House facades in Amsterdam©Dreamstime

As the Netherlands prepares to form a new government, the top parties are divided over what to do about the country’s biggest macroeconomic problem: its towering mortgage debt levels, the highest in the eurozone.

Total Dutch mortgage debt stands at 111 per cent of the gross domestic product, up from about 50 per cent in 1995. The European Commission warned in February that the Netherlands’ high household debt levels exceeded safe limits. Some economists warn the mortgage problem could ultimately destabilise the Dutch economy much as housing bubbles did in Ireland and Spain.

Most analysts say there is no cause for alarm in the near term. The Netherlands has Europe’s largest private pension reserves and substantial personal savings, which together equate to more than double the mortgage debt. But with unemployment and business defaults rising, property values down 10 per cent and expected to fall further, and over 20 per cent of homeowners already “underwater” (owing more than their houses are worth), economists say it is a problem the country must tackle quickly.

    “We are a core European economy with a peripheral European housing market,” said housing analyst Dimitry Fleming of ING.

    “The public tends to look at the Dutch economy as being above the sort of corruption and mismanagement we’ve seen in Ireland and Spain, whereas in my view it looks frighteningly similar. Extremely high levels of private indebtedness, a huge real estate bubble, tremendous write-downs that have not been undertaken,” said Ewald Engelen, a finance professor at the University of Amsterdam.

    The root cause of the problem is that mortgage interest is fully tax deductible in the Netherlands, the only remaining country in Europe where this is the case. The mortgage interest deduction has given the Netherlands one of the worst housing bubbles in Europe, with prices still 30 per cent above their 2000 levels even after recent declines.

    The bubble is exacerbated by exotic, uniquely Dutch interest-only mortgage products developed in the 1990s, such as the “savings mortgage”, in which borrowers make tax-free contributions to a savings account which is used to pay off the entire principal on the day the mortgage expires.

    “It’s an amazingly stupid system,” said Arnoud Boot, a professor of finance at the University of Amsterdam. “It has nothing to do with financing your house, it only has to do with ripping off the government.”

    Meanwhile the volume of Dutch mortgages, which reached €670bn at the end of 2011, is far larger than domestic private savings at €332bn. That leaves Dutch banks dependent on international capital markets to finance the gap, meaning they could be vulnerable if interest rates shift.

    Mr Boot says the new coalition government will have a short window of opportunity in which it should tackle the mortgage interest issue once and for all.

    Indebted Dutch: Mortgage debt

    But the parties currently negotiating to form the coalition, the centre-right Liberals and the centre-left Labour party, disagree strongly on how to handle the mortgage issue.

    Both have agreed that new interest-only mortgages will no longer be tax deductible starting in 2013. But they have clashed over what to do about the huge pile of existing interest-only loans, with Labour wanting to phase out their deductibility, while the Liberals have vowed to protect it.

    Labour’s supporters include many low-income homeowners and renters, while the Liberals represent wealthier constituents with large mortgage payments, making the policy gap difficult to bridge.

    During the elections campaign this month, Labour leader Diederik Samsom called for limiting deductibility on all mortgages to a 30 per cent rate, rather than the top 52 per cent tax bracket. Meanwhile Liberal leader Mark Rutte pledged to roll back some of the mortgage limits to which his party already agreed in April.

    Bankers and economists warn that keeping existing interest-only loans untouched will leave the housing market frozen, as holders of tax-deductible mortgages will stay in their homes rather than give up their tax preference.

    Dutch housing sales have already slowed to a trickle due to uncertainty over future tax treatment, with 48 per cent of houses currently for sale on the market for over a year, according to Rabobank.

    The same uncertainty also leaves homeowners unsure what their houses are worth, which has sent consumer confidence plunging to its lowest levels in decades. That has contributed to stagnation in the Dutch economy, which grew just 0.4 per cent in the first half of 2012 after shrinking last fall.

    But the very urgency of the problem may be driving Dutch leaders to finally take on a politically thorny problem that has been decades in the making.

    “Everyone knows this is the only option,” said Paul Schnabel, director of the Social-Economic Council, a think-tank.

    “Right now people are insecure about what they’re going to do with the mortgages. They’re saying don’t take too much time, do it quickly, give people trust in the future.”

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