The high levels of mortgage debt make Dutch households and banks vulnerable and pose an important risk to financial stability in the Netherlands. That is why the planned restructuring of residential mortgage funding must be carried through. This is the most important conclusion of the newly formed Financial Stability Committee, which met for the first time on 17 December 2012.
In the Committee, representatives from De Nederlandsche Bank (DNB), the Netherlands Authority for the Financial Markets (AFM) and the Ministry of Finance discuss developments relating to the stability of the Dutch financial system. The President of DNB chairs the Committee. The Financial Stability Committee was founded in November 2012, following recommendations by the De Wit Committee. Its aim is to identify and suggest remedies for any threats to financial stability. Besides the Dutch housing market, the Committee, in its first session, discussed the European banking union.
A report of the first meeting of the Financial Stability Committee can be read on
www.financieelstabiliteitscomite.nl (in Dutch). A translation of the report is stated below.
Meeting of the Financial Stability Committee – 17 December 2012
On 17 December 2012, the Financial Stability Committee gathered for its first official meeting.1 In the Committee, representatives from De Nederlandsche Bank (DNB), the Netherlands Authority for the Financial Markets (AFM) and the Ministry of Finance discuss developments relating to the stability of the Dutch financial system. The President of DNB chairs the Committee.
The Committee devoted its first meeting largely to the Dutch housing market, as the high mortgage indebtedness and its funding constitute important risks to financial stability in the Netherlands. Another topic covered was the European Banking Union.
From 1995 to 2008, house prices in the Netherlands rose an average 8% per year, with local spikes of up to 20% in 2000. At the same time, Dutch mortgage debts increased from 46% of GDP to 103%. This development was unsustainable. Over the past five years, house prices have come down to 16% below the peak levels of 2008. As a result, homes have become more affordable.
The housing market has a strong influence on the financial balance sheets of both households and banks. From the viewpoint of financial stability, the importance of the housing market lies in particular in the high debt-to-GDP ratio of Dutch households and the possibilities for the Dutch banking sector to find funding for its large mortgage portfolio. Total indebtedness of Dutch households, at approximately 135% of GDP, ranks second highest in the euro area. These high debts make households vulnerable to a drop in the value of their homes. This is especially the case where the home purchase was financed entirely with borrowed money, little or nothing is being repaid on the principal and the household has been able to accumulate only minor financial assets.
Banks’ mortgage portfolios are so large that a substantial part cannot be funded from deposits. The resulting relatively high dependency on market funding makes banks vulnerable. Since the outbreak of the crisis, professional lenders have become less inclined to invest in mortgage portfolios of Dutch banks, which in turn have become more cautious in providing mortgage loans.
The Committee therefore deems it of the utmost importance for financial stability in the Netherlands that these vulnerabilities should be addressed. In 2013, several measures will come into effect that will contribute substantially towards this aim. The Committee welcomes these measures as important steps on the road to a structurally healthier housing and mortgage market.
The gradual reduction of the loan-to-value ratio (LTV) will reduce the residual debt risk for both households and banks. Limiting the mortgage interest tax relief for new loans in line with full annuity repayment will reduce the fiscal subsidy on debt financing and gradually relieve the dependency of the Dutch banking sector on market funding. A basic principle here is that there will no longer be fiscal incentives encouraging people not to redeem their mortgages or only partly during the maturity of the loan. In addition, the combination of lower LTV limits and simpler, more transparent annuity mortgage products makes it more attractive for professional lenders to invest in Dutch mortgage portfolios.
The Committee acknowledges that these measures will have a dampening effect on house prices in the short term, in the transitional phase towards a new equilibrium.2 It should be noted, however, that the Cabinet has taken some additional measures to stimulate an orderly adjustment of the housing market. For instance, the interest on residual debt will remain tax-deductible for ten years, banks will be given more room to take future income growth of customers into account, the property transfer tax has been lowered permanently and households with an interest-only mortgage will have until 1 April 2013 to modify their mortgage agreement and to speed up their financial assets accumulation against tax-friendly conditions, thereby reducing any residual debt risk.
The Committee is of the opinion that the current adjustment of the housing market is crucial, as are the measures aimed at reducing the debt build-up that came into force as of 2013. These measures are needed to reduce the structural vulnerabilities of Dutch households and banks. It is therefore essential for Dutch financial stability that the planned restructuring are to be implemented in full.
The current interdependence of banks and national governments is a source of financial instability in Europe. The establishment of a banking union – provided it is properly set up – may help unravel this intertwinement. Last month, European leaders and Ministers of Finance took major steps towards an effective banking union. In addition to agreements on the Single Supervisory Mechanism (SSM), they also agreed that priority will be given to the formation of a European bank resolution mechanism.
An essential condition for the proper functioning of the banking union is that not only supervision but also the resolution of banks and, eventually, the deposit guarantee scheme are instituted on a European level. For properly operating European supervision it is also necessary that rules and regulations in several areas are harmonised, so that a European banking supervisor can work to a single rulebook.
The Committee discussed its work programme for 2013 which will be published shortly.
For more information please contact Flore Kraaijeveld (+31 20 524 3091).
[note 1]For the Decree establishing the Financial Stability Committee, see: http://www.rijksoverheid.nl/nieuws/2012/11/02/financieel-stabiliteitscomite-opgericht.html
[note 2]For the CPB (Netherlands Bureau for Economic Policy Analysis) and DNB analyses, see: http://www.rijksoverheid.nl/documenten-en-publicaties/kamerstukken/2012/08/22/kamerbrief-over-analyse-cpb-en-dnb-hervorming-woningmarkt.html