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Thursday, 21 April 2011

Mortgage Interest Deduction revisited: letter from a reader

Today I received a letter from a reader. ‘Anna’, who works for the German-French TV-station Arte writes the following. My answers are put between the italic questions:
I am a journalist working for the french-german public cultural TV station "Arte". For our program, called "the blogger", we concentrate on socio-political topics. We show how people live in other european countries, what shapes their daily lives and how their cultures are different. This week, we are preparing a reportage about housing problems and answers in Europe. In this context, we will come to the Netherlands to investigate two questions:96% of all house-owners in the Netherlands are paying a mortgage and deduct this from tax. Is this policy of the government sensible, or is the next real-estate bubble preparing? What is the IMF-warning all about?

This is a very good question. The mortgage interest deduction was (in a different) form invented in 1893 and went since then through some changes. I think that the mortgage interest deduction especially made sense in the difficult years after World War II when the Dutch people were relatively poor and a lot of homes had been destroyed. With this deduction they were able to receive a higher mortgage and this enabled them to buy a better home.
But like a lot of political decisions that were made with good intensions, it has some nasty side effects. I can show this with an example:

Someone with an average income can pay €700 interest per month for a house (no amortization). When the interest is 5% and cannot be deducted, the maximum that this person can borrow = € 168,000. Hence, the price of an average house for people with his kind of income will be around €160,000 - € 170,000.

But now this person can deduct 40% of his interest from his income. Suddenly this person cannot pay €700, but €1166 (0.6 * €1166 = €700) per month for his house. But as this person still has an average income, the price for an average house will be around €270,000 - € 280,000. This is because the people have not become richer, compared to others, but can only borrow more money. This proves that the mortgage interest deduction is a very inflatory force.

Two other nasty side-effects are:
  • People don’t want to amortize their mortgage amount in order to keep their maximum mortgage interest deduction. This happened with the amortization-free loan.
  • Once you have started with this system, it is almost impossible to get rid off: people have too high loans and can’t possibly pay those without mortgage interest deduction

In my opinion the next real-estate bubble is not preparing: it is already fully there. Look at the ridiculous average housing prices, compared to Germany, Belgium and France. And look at the fact that nobody wants to sell their houses for a lower price although the housing market is totally locked-up. This is because their current high mortgage is hanging around their neck like a millstone. But in the end something ‘s got to give and then the Dutch housing market will blow up skyhigh. This is what the IMF’s warning was all about.

The Netherlands have a very long-standing tradition of social housing, and have the best-developed social housing system in the world. This is put in danger now, with buildings being demolished and access being limited for people who earn more than 33.000 per year. What does this mean for the country?

The populist-rightwing cabinet that we currently have tries to maintain the status quo on the private housing market, especially for the wealthy part of the population. This is the reason they don’t want to get rid of the mortgage interest deduction (MID).The richest people can deduct the most interest as their tax rate is higher than for not so wealthy people (50% vs. 40-30%). So every Euro of mortgage interest returns 50 cent in tax deduction,
Social housing is often seen by the liberal VVD as a leftwing hobby that needs to be battled. The rightwing approach is that everybody needs to own their house, instead of renting it. Renting would only remain for the poorest people. Hence: the maximum income of €33,000. But they forget that with the current housing prices someone with an income of €35,000 can hardly buy a single-family dwelling.

I am not aware that a lot of social housing is demolished currently. In my opinion the only buildings that are demolished are long-term vacant company buildings and buildings in depressed urban areas. That is not necessary a bad thing, as long as affordable renting / private-owned houses do return at the same spot and not expensive houses for yuppies and dinks (double-income no kids). But maybe I am wrong in this matter.

I read several articles on your blog that relate to these problems, most of all mortgages and prices being too high. You seem to know a lot about this subject and tell things very competently! Since I am a bit handicapped by not speaking dutch, I wanted to ask you if you could point out the main actors in this theater to me:  Is there someone who is advocating upholding the state-subsidies for mortgages? 

Yes, there is. The main advocates for this subsidy are:
  • Vereniging Eigen Huis (; homeowner association): Spokesman Hans André de la Porte 
  • Nederlandse Vereniging van Makelaars NVM (; realtors association). Spokesman: Roeland Kimman 
  • VVD (political party) 
  • CDA (political party) 
Is there someone famous in public life or an association or movement against the deductibility of mortgages?

Yes, there is too:

  • Kees de Kort, blogger and macroeconomist with a daily column on Business News Radio ( He is the strongest advocate against this mortgage interest deduction
  • Arnold Heertje. Macroeconomist and former professor University of Amsterdam.
  • D66. Political party
  • PvdA. Political party
  • GroenLinks. Political Party
  • Ernst Labruyère (just joking) 
Is there someone who is warning about a real-estate bubble that could burst soon?

  • Kees de Kort again.
  • Ernst Labruyère too.

It is not only to be joking that I mention my own name, but a lot of famous / well-known people are really afraid to get rid of the MID and they don’t want to hear about a housing bubble. Instead they give you at least five excuses why the houses in The Netherlands are in reality not too expensive. But believe me: they are!

I am very interested in the documentary that Arte will come up with.

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