House prices in The Netherlands keep dropping: A broader look at the Dutch Residential Real Estate market during the last 16 years.

There isn’t a market in The Netherlands, where government officials, insiders and pundits so often try to sell ‘hope’ as an investment strategy, as the Dutch Residential Real Estate market (RRE).

Statements like 'now is the perfect time to buy a house',  'those nasty pessimists spoil the mood of buyers' or 'when all talking about abolishing the Mortgage Interest Deduction stops, the housing market will recover', try to persuade potential buyers into buying a (much too expensive) house.

But there aren’t many markets where hope is such a bad investment strategy as on the same RRE-market.

The latest residential real estate data of the Central Bureau for Statistics (http://www.cbs.nl/) was again little cause for fun & games. The data was not good, as regular readers of my blog already would have guessed. Here are the pertinent snips of the CBS monthly report:

Drop in house prices more substantial

Prices of existing owner-occupied houses were on average 2.8% lower in August 2011 than in August 2010. According to the price index of existing residential property – a joint publication by Statistics Netherlands and the Land Registry Office – the price drop is more substantial than in previous months.

All types of dwellings were cheaper in August 2011 than one year previously. Prices of detached houses dropped most (4.5%), prices of terraced houses the least (2.1%).

Prices fell in almost all provinces. With more than 5%, residential property prices declined most in Limburg and Gelderland. Zeeland was the only province to show a price increase ( 1.7%).

Prices of existing residential property units declined by 0.7% relative to July 2011. In nine out of twelve provinces prices dropped; the most in Limburg and South Holland (more than 2%). With 2.6%, Utrecht saw the highest price increase.

Around 10,000 existing owner-occupied houses changed hands in August, almost 4% fewer than in August 2010. In the first eight months of 2011, over 78,000 houses were sold, a decline by nearly 5% compared to the same period last year.

Readers that don’t know the situation on the Dutch housing market, could think that these declines in housing prices and housing sales are (only) caused by the credit crisis. They could think that the housing prices will increase again, when the credit crisis is over and the financial stability returned to the markets.

Here are five charts with the price development vs. the sold number of houses for the five most popular housing types in The Netherlands, measured since 1995. In these charts, I will show you that the sales decline already set in well before the start of the credit crisis in The Netherlands. And I'll show you that before 2006, the value of all house types almost tripled. As in a bubble... 

All chart data is courtesy of the Dutch Central Bureau for Statistics (http://www.cbs.nl/). For obvious reasons, the sales data for 2011 is missing, but the general sales decline for housing in The Netherlands is 5%, until September. This number will probably increase in the coming months:

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Although it differs from one housing type to another, the general decline in sales in The Netherlands already started in 2006.

In 2006, the credit crisis in The Netherlands was still some two-and-a-half years away:

·    Therefore the credit crisis was not the cause for the decline in housing sales and...

·    The bank rules for lending and mortgages were at that time still: ‘the sky is the limit’.

·    There was also no government legislation on its way yet.

·    Although there was a little rise in the interest rate in 2006, which might have triggered some mood change under house-owners, since then the average interest returned to about the 2005 level;

When these four circumstances are likely not the cause for the drop in sales (although some might have acted as a catalyst), there must have been a different reason.

In my opinion, this reason was a ‘peak oil-ish’ situation in the Dutch housing market: housing prices had to start dropping, because they couldn’t go up any further. The declining sales numbers were the 'messenger' in this process.

The price difference between houses in The Netherlands vs Belgium and Germany had risen well above 30% for an average house in 2006, in less than 12 years.

The price difference was even bigger when you looked at the amount of terrain you received with your house in The Netherlands vs Belgium and Germany. The housing terrain in the latter countries was in general about 2 to 4 times as large as in The Netherlands.

This spread in housing prices between these countries was caused by the ample availability of extremely cheap money for house-owners in The Netherlands: the interest rates on mortgages since 1995, have been well below the median interest of 7% of the 50 years before.

On top of that, the low price of mortgage money was strongly reinforced by the Mortgage Interest Deduction (MID), that brought the bank interest rates of 3.5% - 5.5%, effectively back to 1.75% - 3.25% (for much more on this topic, please fill in MID or Mortgage Interest Deduction at my search engine).

And banks were more than happy to fill your wallet to the brim for house purchases. This situation was roughly comparable to the situation in the US before 2008. 

And suddenly in 2006, the peak housing price was reached. Housing sales declined strongly and the housing prices lagged for a year, before also starting to drop (slowly). This process is enduring up to this day and it won't stop within five years, I guess.

The reason that the housing prices didn’t drop more ferociously, can be found in my article “Dutch RRE market remains locked up badly”.

The main reason remains that it is almost impossible for someone to get rid of residual mortgage debt, when this person sells his/her house for a lower price than the mortgage amount (i.e. the seller had been under water).

This is THE reason that people don’t lower their prices and that the housing market remains locked up badly. People can’t afford to sell their house and get stuck with residual debt; so they keep their house and pray for better times.

The government could have made an important step by abolishing the MID (saves €9bln in subsidies per year) and by offering an intermediate arrangement (subsidy) for people to pay back excess mortgage, but it didn’t. Instead, it decided to kick the can down the road.

And until the day that the MID is abolished, or banks find a way to free people from excess mortgage, the housing market will remain firmly locked. And every new overview of the CBS proves my point over-and-over again.