The coronavirus crisis led to an increase in household savings in the second quarter of 2020. Remarkably, mortgage prepayments – which are also a form of savings – did not increase during the same period. They only increased in relatively young households. This may be due to their higher mortgage...Read more
Better balance between owner-occupied and rented homes would benefit both housing market and society
Affordable rented homes in the non-subsidised sector are hard to find. New entrants to the housing market especially would benefit from a better-functioning non-subsidised rented sector. Moreover, a larger rented sector would also have benefits for the rest of society. While the non-subsidised rented sector in the Netherlands has seen some growth in recent years, it remains underdeveloped. By building more rented dwellings and by introducing unified tax policies for tenants and home owners, the non-subsidised rented sector could grow further.
The non-subsidised rented sector is growing, but supply remains tight
The number of households living in a non-subsidised rented home has increased from 4 to 9% over the past decade (see figure). This is due in part to the entry of private individuals and investors who rent out homes commercially. Still, non-subsidised rented housing only makes up a relatively small percentage of the total housing market in the Netherlands (compared to 47% in Germany, for example).
Chart Distribution of households over housing stock 2009 -2018
Source: CBS housing studies 2009-2018 and own calculations.
Explanatory notes: The figure shows the proportion of households living in owner-occupied dwellings, social housing (monthly rent below the privatisation threshold) and non-subsidised rented homes (monthly rent above the privatisation threshold). Both types of rented housing can be offered by corporations as well as market operators.
Benefits of a larger non-subsidised rented sector
A larger non-subsidised rented sector would have several advantages for Dutch households, as well as for the economy. Young households, for example – which tend to have more job switches and changes in household composition – benefit from the flexibility offered by the rental market. It should also be noted that new entrants to the housing market, who do not have enough savings yet to buy a home, are dependent on mid-range rented housing. In addition, these new entrants are more likely to have temporary or flexible employment contracts, which makes it more difficult to get a mortgage. A larger non-subsidised rented sector also promotes mobility in the housing market. For instance, households in the social housing sector which have increased their earnings since moving into their home often have few attractive housing alternatives. This also applies to senior citizens in owner-occupied dwellings who want to capitalise on their excess value. Moreover, a well-functioning rental market makes it easier for tenants to move – for a new job, for example. This would lead to a better match between supply and demand in the labour market.
Policy still focusing on home ownership
Despite the benefits of renting, the Dutch government’s policy has focused strongly on promoting home ownership over the past decades. Several instruments have been used for this purpose, such as tax advantages for buyers, public guarantees for mortgages and – in the past – subsidies for new-build houses. This policy is based on the assumption that home ownership has benefits for society compared with renting. However, several international studies have shown very little evidence for these perceived benefits – for example that owner-occupiers take better care of their homes. At the same time, the current tax advantages do provide Dutch households with an incentive to invest large amounts of borrowed funds into one specific asset: a home. This leads to long balance sheets and poorly diversified assets, exposing households to relatively high financial risk. Moreover, a higher national mortgage debt amplifies house price volatility, as well as the volatility of the economy as a whole. As such, a larger rented sector would also contribute to the financial resilience of households and to dampening house prices and economic fluctuations.
Same tax treatment of owner-occupiers and tenants
An important reason for the small size of the rental market is the fact that the non-subsidised rented sector is currently relatively unattractive to households. This is due to the fact that the non-subsidised rented sector is the only sector that is unsubsidised. Households with a combined income below the statutory limit have access to the social housing sector, where rents are below market levels. Owner-occupiers, on the other hand, are somewhat protected from high housing costs by the mortgage lending standards and also receive tax subsidies for their mortgage interest. In addition, they pay little tax on one of their largest assets: the value of their home (whereas tenants who accumulate assets unrelated to home ownership are taxed in Box 3). This stimulation of demand by the Dutch government contributes to high house prices. Although recent cabinets have taken initial steps towards reducing tax incentives, the estimated total value of the incentives which are still in place is more than EUR 11 billion. This amount is now collected by levying other taxes (on labour, for example). As a result, the non-subsidised rented sector has not been able to develop properly as an attractive housing alternative. As long as home ownership remains subsidised to the current extent, it will prove difficult to ensure a well-balanced supply of non-subsidised rented dwellings. To achieve this balance, it is important that home value and mortgage debt be gradually moved to Box 3 of the income tax return.
Building rental homes
The growth of the number of households, the increase in flexible and temporary contracts, and the time new entrants need before they have enough savings to buy and furnish their first home all contribute to a growing demand for rented housing. The supply of non-subsidised rented housing is increasing steadily, but the sector remains relatively small. By taking into account the growing demand for rented housing over the coming years in the construction of new homes, for example by explicitly incorporating rented dwellings in zoning plans, housing will become more accessible. One of the main challenges for the near future is to prevent a major slowdown of new construction as a result of the corona crisis.