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Tuesday, 21 June 2011

Dutch Finance Minister Jan Kees de Jager kicks the can down the road for the Mortgage Interest Deduction (MID): failed policy is continued, Dutch housing market remains locked.

Last week, I was quite enthusiastic on the letter that Finance Minister Jan Kees de Jager sent to the Second Chamber of Dutch Parliament. I called him the best minister of this cabinet.

Although I’m still in favor of this conclusion, the Minister himself does everything to make me feel that I made the wrong observation:
De Jager states: there will be no limit to Mortgage Interest Deduction (http://www.rtl.nl/; link in Dutch):

‘There will be no limitations to the Mortgage Interest Deduction’. This was stated by Finance Minister Jan Kees de Jager on Tuesday, during the weekly questioning hour in the Second Chamber of Dutch Parliament.

Herewith the Minister reacts to an idea, launched by CEO of the Rabobank, Piet Moerland, to unlock the totally locked-up Dutch housing market.

Moerland stated last week, that future mortgage applicants should be obliged to choose for an annuitary mortgage, which would in fact result in the disappearance of the interest-only mortgage. As a result of the mandatory amortization, house-buyers would profit less from the maximum mortgage deduction.

De Jager, however, stated that he would stick to the governmental agreement, that the Mortgage Interest Deduction would remain unharmed.

The minister states on top of that, there is no direct connection between the current situation on the Dutch housing market and the MID. When the MID would be limited, this would be a direct enlargement of the housing burden for the Dutch citizens, which would not increase the trust in the Dutch housing market.
I know that Minister De Jager is not a moron, but he is forced by the governmental agreement of VVD (conservative), CDA (Christian-democrat) and PVV (populist) to state these nonsense lines.

And I would call the remark of De Jager that “there is no direct connection between the current situation on the Dutch housing market and the MID”, a blatant lie.

The results of this MID policy and the enduring period of low interest are, that a starter’s house is almost prohibitive for young families. Such a house is namely so expensive currently, that it is impossible for starters or young families to purchase one, without getting an enormous debt burden and starting 'underwater'. The fair value of their new house is in reality about 30% lower than the sales price, as most houses are overpriced by 30-40%. Most young families can't or won't do this and stay in their rental homes.

Especially, now the banks have made it harder for starters to borrow those enormous amounts of mortgage loans that the Dutch market was used to. The people that own the starter’s house, get stuck with it, as they need to sell their own home first, before being able to move to another home. The time that people moved to their new home first and sold their old house afterwards, is definitely over. The result is that the Dutch housing market is locked and remains locked, until policy or the large banks do something about it.

To make the former paragraphs clear to my readers, I will show again the calculation example that I created in my post:Mortgage Interest Deduction revisited: Letter from a reader:

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 
This example shows that the Mortgage Interest Deduction can make houses in theory 30-40% more expensive, than if there is no MID. The prices of Belgian and German houses near the Dutch border prove, that this is also the case in practice. Houses there are indeed about 30-40% cheaper than in the surrounding cities of The Netherlands.



So I will ask the government and especially Finance Minister De Jager one more time:

Please, Mr. De Jager, stop with the disastrous policy of the Mortgage Interest Deduction! Not in five years, not next year. Stop it now!

And invoke transitional arrangements for all people that are currently underwater and/or over their heads in debt, to reduce their mortgage loans until it represents the fair value of their homes! Oblige the large banks, like Rabobank, ING, ABN Amro and SNS Reaal to take their share of the burden.

Stop the disturbance of the housing market in The Netherlands. Don’t wait until the market does it for you! And please don’t think that housing prices will rise again in a few months: this won’t happen, as the imbalances on the Dutch housing markets are too large to ignore.

1 comment:

  1. just posted at the Volkskrant discussion on
    http://www.volkskrant.nl/vk/nl/2686/Binnenland/article/detail/2457072/2011/06/24/Makelaars-maken-verboden-afspraken-over-huizenprijzen.dhtml
    (sorry - it is in Dutch)

    In vergelijking met andere grote steden in de EU is Amsterdam, en eigelijk heel NL, een uitzondering op het patroon van gezonde marktwerking van vraag en aanbod. In Parijs steeg de waarde van een apartement in het 6e quartier in 2010 met tenminste 7.5%. Alleen mindere buurten, ongewilde locaties en verpauperde woningen zakken elders nog in prijs. NL's vraagprijzen zijn dus relatief aan EU vraagprijzen helemaal niet hoog, eerder aan de lage kant. Maar NL banken zijn meer gekneveld door Basel III.

    ReplyDelete

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