Housing market

The Dutch housing market is overheated

The Dutch housing market has been overheated for some time. Over the past five years, house prices have gone up by 8% on average. In November 2021, the average price of owner-occupied homes was 20.1% higher than a year earlier, which is the largest price increase since Statistics Netherlands (CBS) begun its measurements in 1995. This has made it very difficult for households to buy a house. If they manage to find one, they typically need to take on large debts to afford it.

Causes of overheating in the housing market

Overheating in the Dutch housing market is caused by several factors:

• Housing shortage. We have a housing shortage in the Netherlands. Demand exceeded supply by 279,000 houses in mid-2021. (source: Ministry of the Interior and Kingdom Relations). 
• Low interest rates. Low interest rates make it cheaper to borrow money. They allow potential buyers to make higher bids, thereby driving up prices.
• Tax benefits for homeowners and generous borrowing standards. The government makes it financially attractive to borrow money to buy a house. Mortgage interest relief is an important case in point. Also, Dutch consumers are allowed to borrow large amounts relative to other countries. They can finance the full value of the house with a mortgage loan, which is more than in most other countries. This also allows them to offer a high price for a house.

Interest rates are at historic lows throughout the euro area, causing house prices to go up in other European countries as well. But tax incentives for homeowners and borrowing standards are more generous in the Netherlands than in other countries. This causes higher house prices in the Netherlands to be permanently higher.

High mortgage debts

Price increases are not the only problem in our housing market. A related issue is the fact that mortgage indebtedness in the Netherlands is higher than in other countries. Similarly, households assume increasing risks when taking out a mortgage loan, borrowing large amounts in relation to the value of their new home and their income. These high mortgage debts make households financially vulnerable and reinforce fluctuations in the economy. 

Inequality in the housing market

Another problem in the Dutch housing market is the inequality between buyers and tenants. People who own their homes benefit from all sorts of tax breaks that tenants do not. A household renting a home in the non-subsidised sector is much worse off financially than their neighbours who own their home. 

Solutions for the housing market

At De Nederlandsche Bank (DNB), we have  identified several solutions to tackle overheating and other problems in the Dutch housing market:

• More homes. In the coming years, many new homes will have to be built. The central government should assume control over housing construction.
• More affordable rented housing. In particular, more affordable rented housing in the non-subsidised sector is needed. Only 9% of our housing stock consists of such private sector accommodation. In Germany, for example, this is around 50%. If more homes of this type are built, first-time buyers will have an attractive alternative to home ownership. This way, they may also be able to save to buy a home in due course without having to take on huge debts.
• Reduce tax benefits for homeowners. The government must reduce tax benefits for homeowners. For example, by moving home equity from Box 1 to Box 3 for income tax purposes. It could use the resulting revenues to lower income tax, for example. Of course, these tax benefits should be gradually phased out, so homeowners do not suddenly face higher costs.
• Stricter borrowing standards. Borrowing standards in the Netherlands are still too generous. The amount that people can borrow relative to the value of their homes has gone down to 100% in recent years. We believe that this should gradually decrease further to 90%.
• No measures that increase disposable income. The government has recently taken several measures that allow first-time buyers in particular to make higher bids. Examples include the more widely available special loans and the abolition of transfer tax for first-time buyers. The new government has announced the reintroduction of a type of subsidised housing that used to be available for first-time buyers. While these measures are well-intentioned, they only push up house prices further.
• Abolish the gift tax exemption for house purchases. Under the present tax regime, a donation of just over €100,000 may be made tax-free to enable someone to purchase or alter their home or make mortgage loan repayments. The new government has announced that it plans to abolish this widened scope of the gift tax exemption for house purchases. We support this measure as it contributes to a more balanced housing market.

Shouldn't DNB rather be doing something about the low interest rates?

At DNB we are regularly asked why we do not raise interest rates to address the problems in the housing market. As we have seen above, the low interest rates are indeed one of the causes of overheating in the Dutch housing market. In recent years, interest rates have been depressed by the monetary policy of the European Central Bank (ECB). DNB also has a vote in determining this policy, but the interest rates are mainly caused by developments at the global level. For example, people tend to save more as a result of population ageing.  In addition, monetary policy is geared towards the euro area as a whole. It is a European policy, which means we cannot apply it to solve the specific problems in the Dutch housing market.