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Thursday, 26 January 2012

Letter to the Dutch houseowners association "Vereniging Eigen Huis" (VEH )

Yesterday, I got in touch with a representative of the Dutch houseowners association Vereniging Eigen Huis (VEH), Cindy van Noordenburg, via Twitter.

I had written some tweets about this association, in which I rejected its view on the Dutch Mortgage Interest Deduction and the fact that it wants to urge the Dutch banks to resume lending more mortgage money to potential houseowners.

In my opinion, the view of the VEH reflects irresponsible behavior in regard to the Dutch housing bubble and regarding the fact that many Dutch houseowners are already heavily under water. The VEH rather wants to reinflate the bubble than to deflate it.

Cindy sent me a link in which the official stand of the VEH is printed. I will print the most important snips of this stand to be open about it. Of course you can find the whole view of VEH behind the link:

What does VEH think of the Mortgage Interest Deduction (MID)? Interfering in it or not?! Households want their house to remain affordable and don’t want it to lose value, due to a tax measure. The association therefore takes a clear stand on the MID.

The MID is under discussion. The government needs to take austerity measures and the expenses of the MID could become unaffordable in the future. Besides that, the MID could lead to an excess national mortgage debt. Expenses and debt form a threat to the financial stability of our country, so it’s told. That is why some political parties and leading figures from the financial industry plead for abolishing the mortgage interest deduction .

Don’t touch it now, but it's not a taboo for the future!

In the current market situation, a separate interference in the MID is not an option for the association. This will lead to higher housing expenses for the roughly 3.8 mln households with a mortgage. More households will get into trouble. A limited MID will definitely lead to a further decrease in value of all houses. Built-up financial capacity will evaporate and losses on sales will increase. This has serious consequences for the economy and also for employment.

Besides that, a separate interference is a would-be cutback. The result of a deduction-reduction is neutralized by lower tax-yields and higher payments for social securities.

A few direct comments to this view of the VEH, which I translated as exactly as I can:

Expenses and debt form a threat to the financial stability of our country, so it’s told.

This sentence tries to turn facts into ‘just an opinion’ with the last three words. This ‘opinion’ is expressed by the IMF and dozens of economists and financial experts from all over the world. I consider this more than an opinion. One example: if the housing portfolio of the large four banks in The Netherlands would be valued marked-to-market, I am convinced that all four banks would have negative equity. This of course is also an ‘opinion’. 

A limited MID will definitely lead to a further decrease in value of all houses.

The funny thing of the current situation is that the value of houses decreases anyway, with or without the MID.

The VEH asked today to explain the tone-of-voice of my tweets. Therefore I wrote the following letter to Cindy van Noordenburg of the VEH (of course in Dutch).

Dear Cindy,

My opion on the Mortgage Interest Deduction has been unchanged for a number of years:

·         The MID led to an enormous availability of too cheap money (especially with the low interest rates of the last 15 years), as people can borrow almost twice as much money as without the MID. The risk-awareness of the banks as well as the buyers was gone. In my opinion (as I’m not a member of the association), the VEH remained too silent in the media about the consequences of this excess money in the housing market.

·         By requesting the banks to soften the borrowing rules for customers again, you help people getting further indebted than they actually should be. Also you encourage banks to take again more risk. Even the IMF (not exactly a club of misinformed people) talks about the excess mortgage debt of the Dutch citizens.

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.

10. Action to mitigate housing market vulnerabilities and distortions is needed, including a gradual reduction in MID. Given heavy exposure of the financial system to the housing market, a determined response to the buildup of vulnerabilities is warranted.]

·         Since 1995 houses – all house types – almost tripled in value, due to extremely low interest rates and the MID. This was measured through data of the Central Bureau of Statistics.

·         You called the increased housing value built-up financial capacity for people that bought a house before 1995, I call this built-up debt for everybody that bought a house after 1995 and became a victim of this bubble.

·         The higher housing prices only enable higher community and government taxes (real estate tax and income tax) and can only be cashed when you buy a rental house or leave The Netherlands. In all other cases you have to buy an overvalued house yourself. This makes the conception ‘built-up financial capacity’ very relative.

·         Due to the price decreases that occured at the housing market (this process started well before the beginning of the credit crisis), many people can’t pay back their mortgage anymore. Returning to the old, soft mortgage standards will not turn around the process of price decreases. When you think it will, I think you are naïve.

·         By holding on to the MID, you try to maintain the created housing bubble. Instead you could plead for an abolishment of MID (reduction in phases in  5-10 years), in combination with subsidized redemption that is paid from the same €12 bln that the MID currently consumes. I don’t hear you about such a solution.

·         This would make the prices of houses decrease to a level that is more affordable for starters on the housing market, without forcing them to be heavily indebted. This should be also in your interest; or do you only represent the settled houseowners?

·         Besides that, if the MID is totally abolished within 5-10 years, this could lead to a general tax reduction, as the MID should not have to be financed anymore. This reduces wage costs for Dutch companies and makes the Dutch economy more competitive.

·         Our debt position in the world would be much better when the Dutch mortgage debt is reduced and houses are less overvalued. This forced debt destruction already took place in the US. This country seems to have found the path to growth again. The Netherlands is still falling into a deeper recession.

·         You can hardly deny that the number of people in arrears on mortgage debt is getting more and more serious. These people get less and less money for their home through OTC (over the counter) sales or foreclosure, presuming that the bank even dares to foreclose on the house. The housing market is already done with high prices since 2006 and is stagnating ever since: well before the start of the credit crisis.

I understand that your association tries to defend the interests of houseowners, but these interests are better served when people pay back on their mortgage debt (with the help of a temporary government subsidy that replaces the MID) to the level of the true value of their house. And this true value is at least 20-30% below the current price level.

When price and debt destruction do their job, there will be room in The Netherlands for a healthy and realistically priced housing market. But The Netherlands now has to bite the bullet and abolish the MID.

As you see, my opinion is neither based on howling with the ‘media wolves’, nor is it a personal aversion against the VEH. These findings are based on my own investigations. Investigations of which the conclusions are very clear to me, but unfortunately to a lesser degree to you.

I don’t have the illusion that I can convince the Vereniging Eigen Huis with the previous letter; therefore their stand has been too rigid over the years. But maybe I can make the association think a little on the justifiability of their past and present policy. 

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