Housing market issues require a comprehensive approach
Obviously, building more homes is important to increase the availability of housing and reduce shortages. But increasing supply alone does not solve the problem of high prices and poor accessibility, particularly if demand stimuli are kept at the current high level or indeed increased. These stimuli stem not only from low interest rates, but also from the Dutch housing market policy. Tax relief and generous lending standards increase homebuyers' purchasing capacity, driving up bids and, ultimately, mortgage indebtedness and house prices. The housing market issues therefore call for a comprehensive approach that addresses both supply and demand factors. We are proposing four elements that should as a minimum be part of such a comprehensive approach.
#1. Avoid pursuing policies that further increase homebuyers’ purchasing capacity
Recent housing market policy measures tend to increase the purchasing capacity of homebuyers. Examples include the more widely available special loans and the abolition of transfer tax for first-time buyers. While they were well-meant, designed to improve accessibility of the market for owner-occupied homes, they are counterproductive. As it is, increasing purchasing capacity mostly tends to drive up both prices and debts. This is not of much help to first-time buyers, who end up having bought the same home, but at a higher price and burdened with larger debts, with attendant higher risks.
#2. Gradually phase out tax relief favouring home ownership
There are wide tax discrepancies between owning a home and renting one. While tenants pay wealth tax, buyers can build up home equity almost tax-free and benefit from tax deductibility of mortgage interest payments. Of two neighbouring households whose income and family composition are identical, the household in a home in the non-subsidised rental sector is financially much worse off than its neighbours who own their home. This tax regime distorts incentives, thereby leaving the commercial rental segment underdeveloped and driving up demand for owner-occupied homes. High indebtedness makes homeowners financially vulnerable, however, causing peaks and troughs in our economy. One way to reduce inequality is to gradually phase out the tax relief that favours home ownership. This can be done, for example, by transferring home equity from Box 1 to Box 3 for income tax purposes. In the current low interest rate environment, now is a good time to introduce this change. After all, homeowners currently benefit less from their mortgage interest deduction than in a high-interest environment. Our analysis shows that transferring home equity from Box 1 to Box 3 is possible without insurmountable income effects, provided that sufficient time is taken and additional tax revenues are channelled back. Naturally, it is up to politics to flesh out the exact design of such an operation and determine the ultimate impact on purchasing power.
#3. 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. One important objective of this is to reduce underwater mortgages, but our research shows that the regime largely failed to achieve this. In particular, households whose mortgage debts were already low have made additional voluntarily repayments. The gift tax exemption also creates an uneven playing field between home ownership and renting a home. After all, a homebuyer can use this tax-free donation of €100,000 to purchase their home, whereas someone renting their home cannot use this amount to pay rent. In addition, it widens discrepancies between first-time buyers with and without wealthy parents. Abolishing this gift-tax regime therefore contributes to a more balanced housing market.
#4. Building more homes
To address the residential construction challenge, the central government should assume tighter control over housing construction. In addition, it is important that the government arranges for construction in the right market segments and in the right places, such as in the mid-market rental segment. Also, more homes for senior citizens must be built to promote mobility in the housing market. Reforming the home ownership tax regime (see #2 above) will have a beneficial impact on the non-subsidised rental sector, but sufficient time must be taken to implement these reforms. Over the coming years, additional policies aimed at the non-subsidised rental sector will need to be pursued. For example, if it should appear unprofitable for market participants to build mid-market rental housing in certain areas, the government might grant land price discounts in exchange for rent level commitments.