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Monday, 18 April 2011

Getting poor from your own Residential Real Estate (RRE)? Then renting might be the name of the game. But you better watch out for the pitfalls.

The Dutch housing market is still locked up very badly. For inquiring readers of this blog this is old news, but for the people that are in desperate need of selling their former house or appartment, it is a very overwhelming problem. Some people think they have the perfect solution for it: renting their house. However, this solution has some implications that could send shockwaves through the Dutch Residential Real Estate (RRE) market in the near future.

At this moment, it is a fact that single-family dwellings in expensive cities like Amsterdam and Utrecht are extremely hard to sell. The same applies to the top class condominiums and expensive duplex and detached houses in the “Randstad” (the conurbation existing of the cities Amsterdam, The Hague, Utrecht, Rotterdam and everything between it). In general you can say: every house that exceeds a price of €350,000 is considered a sticker at this moment.

This is mainly caused by three circumstances:
  • The current tight lending rules employed by the banks, that make it virtually impossible for a one-income-family to borrow more than (about) €300,000.
  • The extremely high price level in the housing market, caused by the RRE bubble in The Netherlands.
  • The fact that the current houseowners are up to their eyeballs in mortgage debt and have to pay this off when they want to sell their house.
People that are already living in a new house, but still couldn’t sell their former house have a big problem. They have to pay two mortgages and this eats up a large part of their income and puts them under constant pressure from their bank. On the other hand, they don’t want to drop their sales price, as this means they can’t pay off the mortgage on their former home and would stick with a residual debt. This situation led to a deadlock on the housing market.

However, today on the Dutch business news radio station BNR, there was a discussion on the ‘solution’ for this problem: instead of being sold, an expensive house is put out ‘for rent’. Specialized bureaus mediate between landlords and possible tenants for houses that can’t be sold currently. In this way such a house returns enough yield for the owner to pay off the second mortgage and escape the financial pressure. If the bank or third party that provided the mortgage agrees with the collateral being rented, this seems like a viable solution. Landlords and realtors think with this they can tide over this period of hardship on the housing market. They hope to sell the house when better times have arrived.This is the reason that the number of expensive houses and condo’s that can be rented is soaring at the moment.

On the social renting market (the affordable, often subsidized appartments and single-family dwellings) however, scarcity for starters and low income-households remains high. The current cabinet of Prime Minister Mark Rutte wants to raise under circumstances the maximum amount for “social renting sector” houses with €140 from €680 to €820. When real estate-owners and housing corporations refurbish their social renting-houses, they can raise the rent considerably for new tenants. Current tenants keep their current rental amount, except for yearly raises.

This phenomena leads to the strange situation that the renting amounts for houses in the “social renting sector” are currently rising, while the rent in the higher ranks of the “free renting sector” is falling.

This has some undesired results:

  •       For starters and low income-households an owner-occupied house was already too expensive. Now the social renting sector-houses are becoming too expensive too.
  •       People that could afford a bigger house, but currently have a social renting sector-house, stay where they are: moving would mean they would be confronted with much higher rents than now.
  •       People that are rich enough to buy a luxury house, rent it instead:
    •       It is much cheaper now to rent the house than to buy it. 
    •       They can remain waiting until the housing prices fall, which they will inevitably.
  •       The housing market will become even more locked-up than it is already.
And people that are renting their former house can have another big problem: the tenant protection laws in The Netherlands are still very strict and rigid. As soon as your house is rented, the tenant is protected by the tenant protection laws and can’t be easily removed if he wants to stay in this house.

This means that if the expensive house or appartment could be sold to an interested buyer in the future, the buyer has to accept that already someone is living in it. Almost no buyer wants that, as most people buy a house to live in it themselves. This means that the landlord must stick with his second house until eternity or until the day that the tenant decides he wants to move. In the process the owner of the house is involunteerly changed into a real estate magnate.

And this can create more chaos and deadlocks on the already chaotic Dutch housing market.

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