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Moving home equity to Box 3

De Nederlandsche Bank (DNB) proposes several solutions to address the problems in the housing market. One of these involves moving home equity from Box 1 to Box 3 for income tax purposes. What exactly does this imply? And what are the consequences for homeowners? We explain this in more detail below.

Box 1 and Box 3, what are they?

Your income from employment is taxed in Box 1. Owner-occupied homes are also taxed in this box. The mortgage interest you have paid is deducted from your income. Conversely, the notional rental value, which is a percentage of your home's value is added to your income. Private wealth is taxed in Box 3. You must report income from assets, such as shares or savings, in Box 3. 

What exactly does DNB propose?

We propose moving home equity from Box 1 to Box 3. Effectively, this means the mortgage interest tax relief and the notional rental value will be scrapped eventually, and homeowners will have to pay tax on their home equity, which is the value of their home minus the outstanding portion of their mortgage loan. We believe it is crucial to introduce these changes gradually, and therefore propose an implementation period of 20 years. This ensures homeowners do not suddenly face unexpected or high costs.

Another crucial element of our proposal is that the government channels back the extra tax revenues to households. For example by lowering tax rates in Box 3, and by reducing tax on income from employment in Box 1, including tax on pension income.

Why does DNB propose this?

The Dutch housing market is seriously overheated. House prices are very high and rising increasingly rapidly. This leads to several problems. First-time homebuyers experience ever greater difficulties finding  a home. People need to borrow ever higher sums of money to buy a home, which makes them financially vulnerable. Also, there is a financial gap between tenants and homeowners: a household renting a home in the non-subsidised sector is much worse off financially than their neighbours who own their home. This is because homeowners can benefit from tax relief that tenants do not have.

We propose a comprehensive package of measures to address these problems. One of these measures is to move home equity from Box 1 to Box 3. This particular measure ensures that house price rises are less steep. In the absence of tax incentives encouraging high amounts of lending, homebuyers will offer less for a house. It will also contribute to equal tax treatment of tenants and homeowners. In turn, this leads to more homes being built in the non-subsidised rental sector, which also counters price increases in that sector.

What are the financial consequences for me as a homeowner?

We have calculated the financial consequences for households in various scenarios. Our calculations show that if home equity is moved to Box 3 very gradually, the impact on homeowners’ income is on average very limited. In fact, the position of the majority of Dutch households would slightly improve, because the government channels back the extra tax revenues through lower tax on income. This also applies to people with AOW state pension benefits. The exact consequences depend on your particular financial situation. 

Will I run into financial difficulties as a homeowner?

Our proposal is not intended to cause severe financial difficulties for specific groups. According to our scenario calculations, a limited group will experience a deterioration of their purchasing power of more than 1.5% on average. If the government decides to move home equity to Box 3, it could compensate those affected.

The aim of our proposal is to make first-time buyers less financially vulnerable. Tax benefits for homeowners drive up house prices, which prompts buyers to assume larger debts. Reducing these benefits will slow down house price rises, which means first-time buyers need not borrow so much and become less financially vulnerable. 

When will this all happen?

In the short term, little will change for homeowners. It is up to the politicians to decide whether or not to move home equity to Box 3. Moreover, our advice is to introduce any changes only very gradually, to ensure that households do not suddenly face unexpected or high costs. 

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

The overheated housing market has several different causes, such as the shortage of homes and tax benefits for homeowners. Low interest rates are also part of the problem. 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. These low rates are to a large extent driven by changes in the amounts of savings and investments at a global level. For example, people tend to save more as a result of population ageing. This has been a trend for several decades. In addition, the ECB's 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. Fortunately, we have other options to address the overheating in the Dutch housing market, and that is what our proposal is about. 

Why does DNB actually provide advice on the housing market?

We are an economic adviser to the Dutch government. In addition, it is our responsibility to ensure financial stability in the Netherlands. The problems in the housing market affect the economy as well as financial stability, and that is why we provide advice.