Chart of the day: Rise and decline in Dutch house price bubble, 1996-2012
The interesting thing about the chart below is that the maximum rate of property price increases in the Netherlands was just after the euro was introduced when year-on-year prices rose a staggering 20%. Since that time the trend has been down, with prices falling since 2008. Recently, there has been an acceleration to the downside, with prices falling 8% year-on-year in September 2012, the fastest rate in this time series.
Source: NRC Handelsblad
There are 2 bubbly effects in Holland:
-‘normal’ bubble as we have seen in a lot of countries (low interests, high mortgages, dubious debtors, well as usual);
-taxdeduction bubble, not really a bubble in the strictest sense of the word, but probably roughly 30% of the price of Dutch Res RE could until a few years ago be explained by the fact that mortgage interest was tax deductible.
The tax deduction has come under scrutiny, therefor this 30% has become a big questionmark. Basically a combination of pricing in the possibility that the tax deduction in its present form will not survive and will be replaced by something less attractive.
How much is one reversal and how much the other is difficult to judge. But looking at other countries that didnot fail completely like Spain and Ireland the total of both bubbles might account for 50% (70% of 70% (unbubbled houseprice), assuming the normal bubble is around 30%) of the peak price. As not all tax deductions will be reversed the bubble potential is likely something more 35-40% (to be corrected with inflation of say 2% annually).
It simply hasnot arrived there yet. Also the uncertainty about how a new taxdeduction scheme will look like longer term does make buying less attractive.
With Europe in a complete mess and with the private sector stimulus falling away (a lot of borrowing capacity on Res RE like in the US was used for consumption (and generating growth)), we are likely seeing around zerogrowth so not much positive correction from that angle to be expected.
A problem with this is that Holland with its extended welfare sector has reacted very slowly in this respect (like most European countries), so compared to say the US relativelty few mortgages are substantially underwater YET. It is starting to come now. But generally buyers donot see the price being at the bottom yet.
Combined with the government standing as guarantor for a few 100 Bns of mortgages (with only something like 5 Bn to cover for it and a lot of the mortgage market with very few big players (in bad shape, as aproper European bank, in general already), probably not the last thing we see from this. And Holland is likley not the only one or even the worst one.
Thanks for sharing your thoughts there. I know that the UK phased out interest deduct ability but they still had a bubble themselves. In the US, mortgage interest is still tax deductible and that certainly artificially buoys prices.
What are people saying in the Netherlands about where this is headed?
Disastrous! Nobody dares to buy, 30%_40% will be going down in next 4 years. Lots of people hoping to hit the jackpot for their house, but nobody coming to have a look. If they don’t sell they don’t mind; then they stay in the house and won’t start renting themselves untill the bubble bursts completely. Dutch people are still looking at it like a lucky draw……untill there are too many people who HAVE to sell like divorcees, erven, lost jobs…….unless there are too many of them, the prices will really sore down.
If you believe these statistics, it would seem like the price declines are hitting their highest levels now. Does it feel that way though? I was at a Dutch friend’s wedding last summer and everyone was telling me that prices were down and that things were kind of sour. But no one was panicked. Obviously, it’s a wedding and so people are there to have a good time, but I didn’t get the sense things were terrible.
Yet when you look at the numbers, you have to wonder how Denmark, where things are deteriorating, or the Netherlands are not in the press more. How are these governments preventing what we see in Ireland from happening there? To my ears, it all sounds familiar.
When the Dutch market kept rising even in 2008, nobody wanted to hear the bad news. Now there’s some people like Gerald panicking & mired in pessimism. I would draw hope generally from the association of makelaars (real estate agents) near perfect record in incorrect predictions calling for a further fall. Less cynically, there are real reasons to believe that prices will continue to move gradually, whether it be up or down.
1) There continues to be a severe housing SHORTAGE in the parts of the Netherlands where people want to live.
2) Everybody knows that Dutch people have too much mortgage debt, but hardly any one remarks on the fact that they also have better SAVINGS than you might think to counter-balance that.
3) It’s a known unknown that the next government will reform mortgage deduction policy. But once whatever is going to happen happens, the certainty will remove the paralysis. All the people who need to move but are frozen uncomfortably in place for the moment (as accurately described by Gerald) will move, and we’ll have price discovery.
In honesty I would speculate they’ll continue to drift down, just based on the price-to-income ratio as overriding consideration. But take the evidence from your wedding guests into consideration before predicting the declines will accelerate.
Right. I don’t live in the Netherlands so I wouldn’t want to make a prediction that I have to defend but it seems like we are seeing maximum declines now. i would expect the year-on-year declines to diminish going forward from here, with the market still declining somewhat.
Actually, the fact that the maximum year-on-year increases happened in 200 just after the euro was introduced tells me we have had 12 years to work down from an overheated situation.
The key, of course, is the sovereign debt crisis and Holland’s own policy response. The last thing people want now is an overly aggressive anti-stimulus as I think of austerity. In my view, the big difference between the Netherlands and Ireland is two-fold. First, the big increases are years ago instead of just yesterday. Second, the austerity pill has not been as bitter in the Netherlands as yet. Both of those are supportive of a more gentle decline in house prices.
Gentlemen,
hope this logic of averages sheds some light.
– Average 2012 NL house price now around 220K.
– Modal NL salary around 40K. Average is much lower.
Does mortgaging 5x salary seem healthy to you?
How much equity would a 30+ worker have who has to swap his apartment for a family home?
Although EU minds are being prepared to inflate PIGS away, how would velocity increase to push wages up? So only nominator can be tweaked in mortgage/salary ratio, I think battered banks know that too. Inevitable deleveraging.
I agree that the mortgage to income ratio is the single best indicator(but not that salaries cannot rise). I expect the declines to stop when the Dutch market is only slightly more expensive than the German.
@edwardnh:disqus here’s an interesting chart De Nederlandsche Bank put out today illustrating both the higher mortgage debt AND the higher net wealth of people I was referring to earlier. The Dutch are very worried about their pension system, but the truth is it remains one of the best.
https://www.dnb.nl/nieuws/nieuwsoverzicht-en-archief/dnbulletin-2012/dnb280015.jsp
The euro was introduced in Jan 2002. After the largest YOY rises.
Not that it matters, the next govt is currently considering reducing the interest rates benefits given to mortgage holders. That will like signal the final phase with YOY decreases that could rival the increases.
Euro notes were introduced in 2002. But the actual euro came into being in 1999
https://en.wikipedia.org/wiki/Euro