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Friday, 27 January 2012

Increasing numbers of higher educated people are eating into their nest eggs or savings.


While in the US the optimism on the economic situation is growing among investors, The Netherlands is having a brisk walk on the bear-path, still deeper and deeper into the dark forest.

Today, the Dutch radio station Business News Radio (www.BNR.nl) published an article that Dutch people are currently eating into their savings. These are not only the lower paid and educated people, which you might expect. To the contrary, also the higher educated people that earn a more than decent salary are very much represented among this group. Why is that? Here are the pertinent snips from the BNR-article:


According to the intermediate Dutch bank ‘Friesland Bank’(www.frieslandbank.nl), 25% of the Dutch citizens used their nest egg or savings to make ends meet in 2011. What is striking in this result, is the fact that 33% of the investigated group has a bachelor or masters degree in education and an income of €40,000 per year or even higher .

Today Klaas Feenstra, Director Sales of Friesland Bank, stated to BNR that highly educated people use their nest eggs to ‘keep up appearances’ and maintain their lifestyle, to book a (second) holiday or to purchase a car.

The fact that the interest on savings’ acounts is extremely low, is not per definition the reason that the Dutch use their savings: until July 2011, there has been a constant rise of the total savings at Friesland Bank.

Afterwards the savings’ money has been used extensively. According to Feenstra, it is very well possible that people use their savings for amortization of mortgage loans, urged by messages in the media.

Next to this published interview with Klaas Feenstra of Friesland Bank, BNR held a radio interview with Jet Creemers, chairwoman of the Dutch Association of Collection Agencies (NVI). I will show here a translated summary of this radio interview (no link):

Jet Creemers, chairwoman of the NVI  states that Dutch people with higher incomes suffer extra from budget problems, compared to people with more moderate incomes. These people feel the need to maintain their p;d lifestyle and are currently using their savings for investments.

Creemers: ‘many higher educated people had more financial obligations than they could bear. They accepted these obligations, expecting that their incomes would remain rising over the years, These people are now confronted with the consequences of this behavior, as they can’t pay their financial obligations from their disposable income anymore. They are now eating into their savings and nest eggs.

There are a few problems: the yields on invested money dropped, as the duration of the crisis was much longer than expected. This brought the higher incomes into trouble. The interest on savings’ accounts was very low, but the yields on stocks and bonds were also very low.

And at the Dutch housing market, there are a lot of unsold houses. These houses cause double housing expenditures, as the owner has to pay for the old and the new house as well. On top of that, the value of the houses did also drop during the last 5 years; sometimes well beneath the mortgage amount. This leaves people no excess value on their house as a base for new loans. And now the bonuses and extra payments, that people received earlier, have diminished too.

People reckoned with a higher income coming over the years when they stepped into their financial obligations. Now this higher income doesn’t come at all, the situation is getting more and more difficult for these high earners.

While the government is aimed at helping people when the financial damage is already done, it doesn’t act proactively to prevent people from coming into financial trouble. It would be much better when the (local) government would offer help to people that lost their job. Help on how to cope with a lower income, how to keep your budget lean and mean and how to not live beyond your means.

This doesn’t happen yet, unfortunately’

The hardest thing for people during crisis years is saying goodbye to the life that has been, when they can’t afford it anymore and getting used to a new, more austere life.

This is a true process of mourning and letting go of some or all the good things and luxury that these people were used to. Yet it has to happen. Not only for the people that lose their job or get paid much less for it, but also and especially for their wives, husbands and children that were also used to luxury.

Telling your teenage daughter that she cannot ride on horseback anymore is something that no mother or father wants to do. Or telling your son that he has to abolish his sports club.

The greater the difference between the old and the new life is, the ‘easier’ this process might be. If you go from €4000 per month to €2000 per month, you know that you have to radically change your spending pattern.

But if you go from €4000 per month to €3500 per month, you might still spend €4000 per month, as the difference is so small that you don’t notice it directly. These are the situations where people eventually start using their savings’ accounts.

In 2007, The Netherlands and the United States had in common that both countries had a huge housing bubble. Although the Dutch have a much better track record on paying their mortgage redemption and interest, the Dutch housing bubble was hardly smaller than the American one.

The greatest difference, however, between The Netherlands and the US was the pace of debt destruction in the housing market. Since 2007, the US housing market has lost at a brutal pace between 30% and 60% in average value. Of course the housing prices dropped much less in New York than in Florida, but in general the process of debt destruction happened very quickly overthere.

The Dutch housing market has only lost 10%-20% in value since 2007. The government, and special interest clubs like the houseowners association ‘Vereniging Eigen Huis’ (VEH) and the realtors association NVM, tried very hard to regain the pre-2007 status quo, but this had little success. What it did achieve, however, was the extremely slow pace of debt destruction. The bubble deflates with a sizzle and not with a bang.

And then there is also the issue of residual debt for people that want to sell their house while being under water. In reality they can´t do so, as they get stuck with an enormous residual debt that costs years and years to return. The only escape route is defaulting, but this is a long and painful process of at least five years before you can make a fresh start. This obstructs a nasty, but quick process of debt destruction at the Dutch housing market.

This is a negative factor, as the slow debt destruction will probably lengthen the crisis for years and years in The Netherlands. This might be very bad news for the higher earners. Their nest eggs and savings’ accounts might be gone well before the crisis is over!

2 comments:

  1. This is happening everywhere in the West, including in the US. Of the recent 2.8% growth of GDP, 1.9% of that was inventory stockpiling. This number is not sustainable. Still think countries like Holland, Germany, the Nordics - they will have challenges but come out the other end ok.

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