The Dutch savings paradox

The Netherlands has a reputation as a country of savers. The high level of 'collective savings' has a lot to do with compulsory pension schemes, but households have been far from thrifty on a voluntary basis for a long time. Indeed, their 'non-contractual savings' have been negative since 2003; their disposable income – in other words after tax and pension and social contributions – has been lower than consumption ever since. When looked at this way, it can be seen that in no way do households hold their purse strings tight.

Graph 1 compares the decrease of non-contractual savings with the increase of the household balances in savings accounts at banks, both expressed as a percentage of disposable income. The increase in savings deposits has been on a higher level since the early 1990s, whereas the trend in the non-contractual savings ratio has fallen in the same period. Households dissaved continuously between 2003 and 2011, while their savings deposits increased by more than EUR 120 billion.

This paradox can be explained by drawing up a financial balance sheet for Dutch households (see Table 1), which excludes pension assets. There are two reasons for the absence of a one-to-one relationship between savings deposits and the non-contractual savings ratio.

First, in addition to savings deposits there are other liquid financial assets on the balance sheet, between which shifts can occur. For example, when households sell shares and pay the proceeds into a savings account at a bank, their savings deposit increases without it having any effect on the non-contractual savings ratio. And when they finance the purchase of consumer goods from these other liquid assets, the savings ratio falls without it having a structural effect on the savings deposit. This channel has become considerably less significant due to the sharp drop in share prices over the past decade.

Second, excess consumption relative to income may also be financed from the liabilities side of the balance sheet, i.e. by means of a higher mortgage or other debt (consumer credit, student loan). Debt financing causes the savings ratio to fall but does not affect the savings deposit.

 

Source: CPB Netherlands Bureau for Economic Policy Analysis and DNB

A comparison of the household balance sheet in 1991 with that in 2011 shows that the mortgage debt has increased unprecedentedly. The most significant explanation for the savings paradox can be found in the sharp increase in mortgage debts, namely the release of equity in owner-occupied housing. In the 1990s home equity was released mainly because home owners themselves contracted additional debts. They were able to unlock the sharply increased equity in their homes in a tax-friendly manner by refinancing existing mortgages and taking out second mortgages. But this became less attractive after the turn of the century due to tighter rules on mortgage interest tax relief. Moreover, the increase in home equity was by no means as sharp as before, as the rise in prices on the housing market toned down considerably and even became negative after 2008.

Although home assets increased substantially between 2001 and 2011, net wealth hardly rose because of the simultaneous mortgage debt increase. The home equity release nevertheless continued in that period, albeit in a different form. In the Netherlands, many home owners sold properties the mortgage on which had been redeemed (for the most part). Mainly senior citizens moving into rented accommodation and beneficiaries to deceased home owners released home equity that way. When a person entering the housing market takes out a mortgage to buy property from a person exiting the market, the home assets and mortgage debt on the former's balance sheet increase. But on the latter's balance sheet, the home assets decrease and, after repayment of the residual debt, the savings deposit increase. When he or she subsequently uses the equity to purchase consumer goods, thereby drawing down the increased savings deposit, this will have a downward effect on non-contractual savings. Further micro-level studies are needed to shed proper light on this issue.

What happens to the released equity on the aggregate household balance sheet will depend on the consumption and saving behaviour of senior former home owners and their beneficiaries. In the past decade the Netherlands showed a mixed picture. The large-scale release of home equity allowed the savings deposits to increase, while at the same time causing the contractual savings ratio to fall. This type of home equity release was considerably more widespread than in earlier decades. Not only were the house prices at a much higher level, but home ownership among senior citizens also increased substantially. When in the future there are fewer senior citizens with home equity as a result of lower prices and reduced repayments by later generations, the home equity release will once again decrease.