Many are unaware of this but there is an housing bubble and bust cycle ongoing right now in the euro zone core. I’m talking about the Netherlands, of course. Prices are now back to levels last seen in 2004 and still dropping. The problem in the Netherlands is similar to what we have seen in the US, UK, the Baltics, Ireland and Spain, namely that Dutch house price gains far outpaced economic growth in the lead up to the financial crisis. And now that we have crisis, the bubble has burst, leaving enormous household debts as much as two-and-a-half times GDP. The net effect of this private sector debt overhang has been worsening economic demand and unexpectedly large budget deficits, necessitating austerity under the Maastricht Treaty guidelines.
This is just an update on that situation. The last update in August showed prices collapsing at an accelerated rate, with knock-on effects for demand. The question is when is this fall in prices going to end. Usually, the fall in turnover precedes changes in price in the housing market because the psychology of house sales often causes sellers to de-list instead of accepting a price cut. What this means on the way down is that transaction volume falls off a cliff while prices edge down in a more moderate fashion, with the transaction decline leading the price decline that occurs when sellers are eventually forced to cut price. Eventually, the transaction volume turns up and then so do prices.
The latest data show that the fall in transaction volume continues, however. I caught this tidbit via the flemish-language Belgian daily De Standaard, which said that housing transaction volume across the border in the Netherlands in Q3 was 18,664, a 17% decline from the previous year. De Standaard wrote that the quarter-to-quarter decline in house prices was still an impressive 2.2% from Q2 2012 to Q3 2012, putting average house prices at 209,000 or a 7.5% year-on-year fall from Q3 2011. Since the crisis began, prices have fallen 15%.
My read here is that, if anything, the price declines accelerated in 2012 and that means we are nowhere near bottom for the Dutch property market. More losses are coming – and that is negative for economic demand in the Dutch economy and for the Dutch budgetary situation.