More and more higher/double income households are drowning in debt

Steady readers of this blog know that the Dutch housing market and the build-up of debt in Dutch households are two of my key interest points.

Last week, in my SMS from Ernst, I already wrote on the deteriorating financial situation of house-owners in The Netherlands, as this was reported by the Dutch Bureau for Credit Registration (BKR). Here is a snippet of this article:

The number of people that suffers from problems with the mortgage payments is soaring. In Q3 2011, more than 40,000 households had an arrears of at least three months. This is disclosed in data from the BKR.

Last weekend (29-30 October 2011), the financial newspaper Het Financieele Dagblad (http://www.fd.nl/), wrote an interesting article on the deteriorating financial situation of the higher and double incomes in The Netherlands. Although The Netherlands seemed like a beacon of stability, low unemployment and prosperity until now, something is definitely brewing beneath the waterline. And that something is the unsustainable debt burden that many households have created to maintain their house and their lifestyle.

As this article is in my opinion a must-read, but is unfortunately printed in Dutch, I write an extensive summary of it here :

More and more higher/double income households are drowning in debt (link in Dutch)

Becoming unemployed and subsequently getting endebted deeply, being forced to sell the house and to go to a specialized bureau for help with debt problems. It is a haunting image that many people have in their heads every now and then. Especially with the current news messages on bankruptcies in the building and construction industry and the reorganizations that are taking place at large construction companies. And this haunting image is becoming reality more and more often, also for modal and above-modal incomes. Unemployment is already increasing for three months in a row. September 2011 added 17,000 unemployed in The Netherlands, setting the total to 438,000.

The ‘high profiles’; this is the name that unemployed, formerly double income families with a jumbo mortgage receive at the Communal Finance Company of The Hague, ‘This group is growing visibly’, according to a spokeswoman. ‘And the mortgage debt has an increasingly important role in this. People are forced to sell their house and sometimes remain with a residual debt of €100,000+’.

The same is true for the community Zaanstad and region West-Brabant. ‘Where initially excess spending was the cause, the issues are now caused by more complex cases like excessive single-premium assurance policies and mortgage debt, because houses can’t be sold’, according to the community Zaanstad. ‘The crisis changed the profile of the persons who are asking for help’, according to a spokeswoman of the region West-Brabant in Breda. ‘The locked-up housing market causes residual debts of tens of thousands of Euro’s, in case of a forced house sale, due to divorce or unemployment’. 

The image that is sketched by The Hague, Zaanstad and West-Brabant is equal to the country-wide image, according to Joke de Kock, chairman of the Association for Indebtedness Relief and Social Banking (NVVK). More than 85% of the communities is member of this association. De Kock, who is also Head of Indebtedness Relief in Tilburg:’Also modal and above-modal incomes start registering with us, that is very clear. They have problems with their financial products, with their mortgage, with all kinds of financial obligations, or become unemployed. People must accept a lower-wage job, that yields them €500 per month less income. Also the child care subsidy disappears when people become unemployed; this subsidy is for three children about €1000 per month’.

Another factor are credit card problems: ‘people spend with several credit cards until their limit is gone, settle for a pay-back arrangement and subsequently violate this arrangement. After this happened, the credit card company demands the whole debt to be paid back in full. People then don’t have this money available’, according to De Kock.

"People find it very hard ‘to cut their coat according to their cloth'", is De Kock’s experience. ‘When it takes people four months to do so, there are already holes in their budget. And people let expenses increase with their behavior. Not paying one month of mortgage or rent of only €600, costs after only four months already €1400, due to collection fees, verdicts and third party-seizures’.

In 2010, there were 711,000 households with problematic debt, 10% of all households in The Netherlands. More recent data was not available, but signals come from different sides that these data are much higher now, due to the increasing economic malaise.

For instance, in October 2011 the number of households in arrears with their mortgage obligations soared to 45,000 from 37,000 YoY, according to the BKR last Tuesday. These arrears are at least three months. In 2005, this figure was 66% less.

Also the Guarantee fund Owned Houses (WEW) that supplies a guarantee for houseowners that can’t pay their house anymore, signals a doubling of the number of mortgage payments in arrears to 5000, compared to 2010. ‘A substantial increase’, according to managing director Karel Schiffer. These are arrears of at least four months. ‘However, 60% of these cases can be solved by the people themselves, without our help’. The number of forced house sales is stable at 2000 per year, 40 to 45 per week.

Dirk Hanke, Managing Director at collection agency Vesting Finance Services, initially tries to prevent auctioning of houses, acting upon instruction from the banks. ‘First we try a private sale. This yields much more money than auctioning. In a private sale, the sales value of a house is about 20% below market value, while auctioning often only yields 65-70% of market value’.

An important office for indebtedness relief is the community. Also the number of households that registers there is increasing. ‘To 80,000 last year from 53,000 in 2009’, according to De Kock. More recent data is not available. ‘It is totally unclear what the effects of government cutbacks will be for the number of households drowning in debt’. What is clear, however, is the average amount of debt: €30,000, spread over 16 different creditors.

Lennart Ruig of research center Panteia and author of the book ‘Households in debt’ states that the data of the NVVK is only the tip of the iceberg. ‘There is a large group of people that doesn’t register. Only a small part visits the Communal Indebtedness Relief’.

This was an excellent article. And a very important one. Important, because printing it in a national, well-respected newspaper puts it in the center of attention of the national decision makers.

The article adds to my opinion that the current average Dutch mortgage debt is much too high for many people to bear and that ‘kicking the can down the road’ is not a viable strategy for solving the problems on the Dutch housing, mortgage and debt markets.

Politics must act and they must act now: by abolishing the Mortgage Interest Deduction law and by introducing a temporary subsidy to help overindebted people to lower their mortgage amount to levels that can be borne, even by people that become unemployed.

This will take some extremely painful measures and it will alienate people and banks that still dream of the Dutch housing market totally recovering within three years.

But the financial stability of The Netherlands is more and more in jeopardy by the extremely and unsustainably high mortgage debt and by the growing number of people that can’t afford their mortgage anymore.

I’m not the only one that states this; a warning shot was fired by the IMF in their yearly report on The Netherlands of 2011:

However, household debt has grown substantially in relation to disposable income, to over 270 percent in 2010, among the highest in advanced economies. In addition, the loan-to-value (LTV) ratio of new mortgages has continued to rise from its already unusually elevated levels, and exceeded 120 percent in 2010 according to some measures. Liberal mortgage interest tax deductibility (MID) has inflated mortgage size, and also led to the proliferation of interest-only non-amortizing mortgages since the mid-1990s.

I summarized this report in my March 29-article: IMF Report Article IV consultation.

And to supply you with some hands-on experience with the Dutch problem of extremely high housing prices and excess indebtedness, I will print a comment I received last week from a reader, called ‘Alexis’:

Happy to have recently found your blog and finding it quite interesting. I spent 20 years in the real estate industry in the US and abroad and have never seen a more dysfunctional or dangerous system. With the highest mortgage debt to gdp ratio in the developing world, the housing market has the potential to totally destroy the seemingly solid Dutch economy. My husband and I are in the exact situation you've described - in a house with a mortgage that exceeds market value by almost 20%. To make matters worse, I have to leave the country for medical reasons and he is of course coming with me and there's no way we can sell our house in time or at the price we'd need to pay off the mortgage. We can't even get into a debt-recovery plan because we're leaving the country and we're not Dutch citizens so we're never planning to come back. We're trying to find a way to settle this before we have to leave but there doesn't seem to be any alternative to just abandoning our property and the on House prices in The Netherlands keep dropping: A broader look at the Dutch Residential Real Estate market during the last 16 years.

I have nothing to add to this letter. So, please politics; do something about this unsustainable situation in The Netherlands.