House prices level off in the Netherlands

House prices are leveling off in the Netherlands, after a boom lasting more than a decade.

In September 2008, the price index for owner-occupied houses was 2.5% up on a year earlier, according to Central Bureau of Statistics. When adjusted for inflation, the index fell 0.5%.

In Amsterdam, the capital, the average house price was €3,360 per sq. m., 7.5% up from a year earlier. In Utrecht, the Netherland’s 4th largest city, house prices rose 7% to €2,549 per sq. m. over the same period.

House prices rose in The Hague by a mere 1.1% (to €2,071 per sq. m.). Similarly in Rotterdam, house prices rose only 1.2% (to €1,911 per sq. m.).

House price movements reflect the economic cycle

Holland saw a dramatic increase in house prices from 1996 to 2001, with 13.2% price rises annually, pushed by rapid economic growth. During this period the economy grew 3.7% p.a., and real private sector wages by 3.6% annually; while inflation was only 2.7% p.a., leading to a significant increases in purchasing power.

From 1995 to 2001, average house prices in the Netherlands rose by about 110% (78% in real terms).

From 2001 to 2003, annual GDP growth slowed to 0.8%. Political instability contributed to the recession. In 2002, two governments fell (the Wim Kok government in April 2002, and the first Balkenende government in October 2002). Then the leader of the right-wing populist party (LPF), Pim Fortuyn, was killed, days before the May 2002 parliamentary election. House price rises slowed to a crawl.

However the Dutch economy eventually recovered, growing 2.6% annually from 2004 to 2006.

By Q2 2006, house prices were 14% up on three years earlier, with strong increases in The Hague (18%) and in Utrecht (15%).

A significant slowdown is now occurring, pushed by politics and the global financial crisis. Economic growth is expected to slow to 2.3% in 2008, after 3.5% growth in 2007 and 3.4% growth in 2006.

Generously subsidized Dutch mortgage market

The Dutch mortgage market has expanded rapidly over the past decade, with residential mortgage debt rising to 98.6% of GDP in 2007, up from only 49.3% of GDP in 1997.

Why? Partly because the Dutch fiscal regime allows full tax deductibility of most mortgage interest payments at the marginal tax rate. Mortgage market liberalization has also brought much new competition, and since 1995, 90% of new mortgages have been of a type that is not repaid until the loan maturity, while 30% do not have to be repaid at all (“interest-only”). The proportion of mortgages with LTV ratios of more than 100% increased from 15% in 1990, to more than 70% by 2001-02.

The government has attempted to discourage excessive mortgage growth:

• In 2001 tax deductibility for mortgages used for non-housing consumption or investments and second-home purchases was removed.
• In 2002, interest deductibility was limited to 30 years.
• From January 2004, homeowners moving to more expensive homes have had to use their capital gains on their former house for down payment.

These measures, combined with the credit crisis, contributed to the slowdown of the housing and mortgage market.

In Q2 2008, the value of new residential mortgages fell 3.6% from a year earlier.

Interest rate reductions

The great Dutch house-price boom has been encouraged by a reduction in mortgage interest rates from an average of 9.58% (1990 to 1992), to 4.7% in May 1999. Mortgage interest rates then hovered between 5% to 7% between 2000 and 2002.

Interest rates for mortgages are generally based on the Euribor (Euro Interbank Offered Rate).

Mortgage interest rates dropped from 4.5% in 2003 to 4.18% in 2004 and 3.16% in 2005, before moving up to 4.37% in 2006 and 4.96% in 2007. In August 2008, the average mortgage rate was 5.24%.

Most Dutch housing loans are fixed rate mortgages (FRM), i.e. fixed interest rates for 5 years or more.

However when mortgage rates were falling in 2004 and 2005, more households took adjustable rate mortgages (ARM). By end-2004, the share of households with ARMs with a fixation period of less than one year was 40%.

Recently, households have chosen mortgages with fixation rate periods of between five to ten years. As of Q2 2008, such mortgages accounted for 47% of total outstanding mortgages. The share of mortgages with fixation period of more than ten years fell to 16%. Around 21% of mortgages have an initial rate fixation of 1 to 5 years. ARMs of less than one year fixed are only 16% of the market.

Social housing and the rental market

The Netherlands’ housing market is highly distorted by government intervention.

Traditionally Holland has had a large social rental housing sector, and in the 1950s, owner occupants accounted for only 29% of the housing stock. More recently the government has been promoting home ownership, with remarkable results. Owner-occupancy rose to 42% by 1980, then to 55% by 2005.

Homeowners receive favorable tax treatment. There is full income tax deductibility of mortgage interest payments; this is significant in view of the high marginal income tax rates. The capital gains from rising house prices are also not taxed. However, this is partly offset by an annual imputed rental income tax, based on the property’s assessed value.

The government provides home-ownership grants to low-income households. Many renters also receive direct government subsidies to keep their rent-to-income ratio within certain limits.

In 2001, total government subsidies for the owner-occupied sector amounted to around €8 billion, with a similar amount provided for the rental sector. The system is highly inefficient in terms of social objectives. It also reduces mobility both for owner-occupiers and renters.

Around 43% of the total housing stock in 2006 was rented housing; 80% of which was social housing. A huge proportion of rented accommodation is owned and managed by housing corporations.

About 95% of the rental stock falls under a special regulatory framework (see Landlord and Tenant section). A landlord may impose rent increase once a year, but the government sets the maximum rental rate increases.

From 2001 to 2004, actual rent increases were based on the average inflation rate during the preceding five years. In July 2005, annual rent hikes were then based on last year’s inflation rate plus a fixed surcharge. However, the fixed surcharge was removed in 2007. The maximum rent increase allowed was set to a level equivalent to last year’s inflation rate.

The maximum allowable rent increase from July 1, 2008 to June 30, 2009 is 1.6%, equal to the inflation rate in 2007.

Demand strong, supply insufficient

Every year the number of single-person households in Holland increases, growing faster than the overall population, and faster than the rate at which dwellings are constructed.

The number of one-person households increased from 1.1 million in 1908, to 2.3 million in 2000.

The housing supply has simply been insufficient. No less than 80,000 to 100,000 new houses are needed each year. In 2007, 87,537 units were added to the dwelling stock while 23,840 units were removed, a net increase of only 62,929 dwellings – the highest net increase in dwelling units for almost a decade.

Despite the increases in supply in 2007, higher interest rates and higher prices have hit demand, and total residential sales have dropped. A total of 202,401 dwellings were sold in 2007, 3.5% down on a year earlier.