The overheated Dutch housing market has to contend with multifaceted and urgent issues.Read more
Our high mortgage debt– risks and solutions
In the Netherlands, we have high mortgage debts. This leads to financial risks for households, but also for our economy as a whole.
The Netherlands is a leader in mortgage debt
A private home – for most people it’s the biggest purchase of their lives. Most Dutch people take out a mortgage for this. 61% of the population has one (source: Statistics Netherlands). That is the highest percentage in the entire European Union. But that is not all. We also borrow a lot of money compared to the value of our house and our income. In mid-2020, Dutch households together had more than EUR 740 billion in mortgage debt.
Risk to households...
The high mortgage debt leads to risks for households. Because people who spend a large part of their income on repayments and interest have a smaller buffer for financial setbacks. This might include unexpected expenses or a fall in income.
In order to prevent households from getting into financial difficulties, we have borrowing standards in the Netherlands. For example, people are not allowed to borrow more than 100% of the value of their homes. But even with these standards, some groups have little money left when they borrow the maximum amount.
Another risk of a high mortgage is that houses will be ‘underwater’ if house prices suddenly drop. This means that the value of the houses is lower than the debt owed on them. If someone has to move, for example because of a divorce, they are left with a residual debt.
...and to our economy
The high mortgage debt has another drawback: our house prices and our economy are more volatile than in other countries. This is how it works. If the economy does well, house prices in the Netherlands rise more strongly than elsewhere. Because we borrow so much, we can pay more for a property. And as houses gain in value, homeowners become richer and spend more money. As a result, our economy grows extra fast.
If the economy does badly, the opposite is the case. We saw that in the period 2009-2013. At the time house prices fell. One in three mortgages of households went under water. Many of these households then made cutbacks. As a result, the economy received an additional blow.
The reason? We're allowed to borrow a lot.
Our mortgage debt is so high because the government makes it attractive to borrow money for a house. Mortgage interest relief is an important case in point. But we also have flexible borrowing standards in the Netherlands. You can take out a mortgage equal to 100% of the value of your property. In other countries, this is often 90% or less. We also borrow more in relation to our income than in other countries.
At De Nederlandsche Bank (DNB) we believe that the government should do a number of things to reduce our mortgage debt:
- The government must reduce tax benefits for home owners. Eventually, these must disappear altogether. Of course, these tax benefits should be gradually phased out so house prices don't suddenly fall.
- And borrowing standards in the Netherlands need to be stricter. 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%. In the meantime, there must be more affordable rental accommodation. So, people have a good alternative to buying their own home.
Some sections of the population have trouble finding a home. That is also a reason why we need more rental accommodation. Read more about this on our housing market page.
The economic recovery continues at a robust pace, the search for yield continues and house prices keep going up. Against this backdrop, it is important not to lose sight of growing vulnerabilities and risks to financial stability.Read more