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Tuesday, 17 May 2011

Residential Real Estate revisited. Dutch banks do everything to maintain the current status quo, trying to postpone the inevitable: lowering housing prices.

In the old days of the vinyl records (yes, I’m that old!), something could happen with the grooves on those records. After a groove was seriously damaged, the turntable played the same part over and over again.

That is exactly how I feel after reading two of today’s and yesterday’s articles in the Dutch financial newspaper Financieel Dagblad (

In these articles the Dutch banks Rabobank, ING Bank, ABN AMRO and SNS Reaal state that they are in favor of more flexible rules for supplying mortgage loans to starters on the housing markets. At the same time the banks will demand from their customers that they actually pay off their mortgage loan, instead of supplying interest-only loans to them. The general idea is always that this will set the frozen Dutch housing market free.

Read here the pertinent snips of “Rabobank wants more flexible rules for mortgage and more repayment” (link in Dutch)

Banks should receive more freedom in supplying mortgage loans to starters on the housing market. At the same time the banks will further limit the supply of interest-only mortgages. 
That proposal was offered by Piet Moerland, chairman of the board of Directors of the Dutch international bank Rabobank, in a conversation with the Financieel Dagblad. Moerland states that banks, supervisors and the responsible ministries get round the table at short notice to have talks about the stalled Dutch housing market.”My plea is to approach the housing market problem integrally, aiming to promote the circulation of housing” according to Moerland. 
In this deliberation the Rabo chairman not only wants to discuss his own proposal, but also the situation on the rented housing market and the Mortgage Interest Deduction (MID). Moerland himself doesn’t make a proposal on this last sensitive subject. 
Moerland’s appeal comes at a time that – according to economists of his own bank – 180,000 houses are for sale in The Netherlands. Last year (2010) there were only 130,000 transactions. The housing market has stalled due to fear for economic headwinds, an increasing mortgage interest, new rules and a more aggressive acting supervisor. Rabobank, as market leader,  has a great interest in a flexible housing market. 
As a result of the stringent enforcement of new rules by supervisor AFM (Dutch Authority Financial Markets), that is afraid that consumers will be left with too high debt, the banks nowadays hardly dare to supply mortgage loans to starters, independent professions and small traders. Previously,  mortgage salesmen had some liberty when estimating the future earnings of these customers. Nowadays, however, the AFM demands that future earnings forecasts are based on hard commitments from employers, or detailed documentation in case of an independent profession / small trader. This makes that even dentists and pilots have less access to the mortgage market than before. 
“I don’t want to say anything bad about the AFM, as they protect against overcrediting, but this supervisor limited the possibilities of banks to supply mortgages”, according to Moerland. He thinks the AFM should be less stringent. “ Give the mortgage advisers some room for tailormade solutions”. Among others, the Rabobank received a penalty last year, as they supplied higher mortgages than allowed to promising customers, like highly educated starters.  
And here are the pertinent snips from a second article, describing the reactions of the other banks to the Rabobank proposal: “ More and more support for proposal Rabobank concerning mortgage market” (link in Dutch)

After ABN AMRO and ING Bank, now also bank/insurer SNS Reaal is emphatically supportive of the statements of Rabobank’s chairman of the board of directors Piet Moerland, concerning the Dutch mortgage market. 
This was stated this morning by financial senior executive Ference Lamp, during a interim trade report of SNS Reaal. 
Also ABN AMRO and ING support the appeal of Rabobank’s chairman Piet Moerland to get to a national discussion on the stalled housing market. They stated this on Tuesday, May 17th to the Financieel Dagblad. “We support the thought for a wide-angled discussion with the relevant parties on the problems in the national housing market”, according to ABN AMRO.
There are two kinds of solutions for problems:
  • The (real) solution to a problem 
  • The solution that you find, if you don’t want to know the real solution to a problem. 
This ‘solution’, found by the largest banks in The Netherlands, is definitely the latter.

The real solution to this problem – and this is the part where I feel like a vinyl record with a damaged groove – is to lower the prices of the Dutch houses to set the Dutch housing market free again. Please read:

and some older posts on the same subject.

Here is the main part of “The Dutch housing market is not further locked up…”, that explains it all: 
THE main cause for the housing market being locked-up is that the PRICES are TOO HIGH. 
I can’t explain to people that in Germany, close to the border with Holland, you buy a residence with 8 rooms and 10,000 Sqr ft of ground for €200,000, while a starters home in The Netherland with 3 rooms and 1350 Sqr ft of ground costs also €200,000 
When I tell this to people, they all react like:
  • “Houses are scarce here in Holland
  • “In the provinces Friesland of Groningen houses are much cheaper too, but there is no work”
  • “It is inevitable because so many people are looking for a house” 
My standard reaction is: “if houses are that scarce in Holland, why houses with the current prices are often for sale for up to two years or more”. They reply:”you are right, but we can’t lower the price, as we can’t pay off our mortgage then”. 
There you got it! The main reason that the Dutch housing market is locked up is: Many people are up to their neck into debt, due to the fact that their mortgage is way too high, but they don’t want to sell their house for a lower sales price as they can’t afford then to pay off their mortgage. 
Yes, we have had a housing bubble in The Netherlands before the crisis in 2008, due to the extremely low interest rates of for instance 3,2% on a floating rate mortgage.  Everybody in their right mind knows it! 
Icing on the cake is the Mortgage Interest Deduction (or MID) that makes that housing prices in The Netherlands are much higher than in our surrounding countries, as people can borrow more money with the MID, without paying more interest. No right-wing politician wants to get rid of that, as their grassroots support with their million dollar residences will be disproportionately hit by this decision 
As a consequence house prices are kept artificially high, as people remain underwater (i.e. current sales value of the house is lower than the mortgage principal), but keep paying their interest on their (interest-only) mortgage. 
This asks for an explanation: In contrary to the USA it is impossible in The Netherlands to leave your house key at the bank and wave your mortgage goodbye. The mortgage here is a personal loan and if you don’t pay it off:
  • Either it will be with you for the rest of your life as a residue debt.
  • Or you get declared bankrupt and then you have a cooldown period of at least 5 to 10 years in which you are obliged to repay your debts to a certain amount. 
In both cases you get a negative registration at the Bureau of Credit Registration (BKR) also for at least 5 to 10 years, meaning:
  • You can’t get a new mortgage
  • You can’t get any loan whatsoever
  • You can’t get a creditcard
  • You can’t even get a customer card in any shop
  • You can’t buy a mobile phone with a subscription
  • Hence: You are virtually a renegade 
This makes that the paying ethics in The Netherlands are extremely high: people don’t want to turn into renegades and keep on paying their (way too high) mortgages, while it would be much better if they could sell their house and start to live cheaper. 
The large mortgage banks themselves are also slow with putting pressure on people in arrears. They know very well that currently the mortgages are often way higher than the execution value of the house. People defaulting on a large scale would mean that the banks would have to revaluate their asset portfolio, which would have substantial consequences for the bank’s core tier one capital. 
Therefore the banks “help” the people in arrears by temporarily accepting lower payments and not forcing them into a sale under distress. 
The result is that the prices remain high, the people remain paying too much on their mortgage and the banks remain covering up the problems of their customers and showing off with the high paying ethics. 
That is the recipe for the perfect lock-up of the housing market. The only thing that the new AFM rules do, is emphasizing the problem as-is. 
And it seems that the only thing the banks could come-up with yesterday and today, is trying to bend the rules that are not in favor of them. And I’m very afraid that the current Finance Minister Jan-Kees de Jager will allow the banks to do so, thus helping the Dutch housing market bubble to remain inflated, until it will really burst.


  1. “In these articles the Dutch banks Rabobank, ING Bank, ABN AMRO and SNS Reaal state that they are in favor of more flexible rules for supplying mortgage loans to starters on the housing markets.”

    Isn’t that just great. It was the flexible rules that lead to the quadrupling of the housing prices and subsequent collapse of several major banks in the Netherlands, when homeowners found out that they were only paper millionaires. Now they want to make the rules flexible again because they find the market has completely frozen up, and they do not have capital to meet Basil III requirements.

    I agree, the only way is down.
    In the street where I live there are half a dozen homes for sale. Up form zero at the end of ’08. The prices are still very high. Apparently there are still people willing to pay E370k for an 80m2 third floor apartment. I paid E40k 20 years ago for the same. I don’t think these levels are sustainable.

  2. It is difficult to believe that banks are stupid enough to re-inflate the bubble knowing that the final burst will be much worse, specially after these last years when the impossible (houses not a good investment anymore) proved true. Should this happen they would crack down; maybe they didn't realize in 2008 but now they know it.

    My impression is that they are tryig to avoid the market to collapse by keeping it frozen until the economic situation allows buyers to catch up with current prizes. That means prizes stable or slightly decresing for a couple of years and slowly increasing afterwards. Thus, real estate would be no big business anymore but the bubble would be smoothly absorved.

    Great blog!