Search This Blog

Saturday 14 April 2012

Ernst’s Confessions: The housing prices in The Netherlands are not so overpriced currently as I thought. But I doubt if that will set the housing market free in the coming years

Sometimes I get caught in one of those fierce Twitter discussions on the Dutch housing market. The question on hand is whether it is overpriced or not.

In the past few years, I looked at the price development in the period 1995 – 2007, when housing prices almost tripled in value: from 100 in 1995 to 270 in 2007 and I jumped to the conclusion that a real housing price bubble had developed in The Netherlands.

My stance until now had been that the Dutch housing market was about 30% too expensive in 2009 and as the housing prices had dropped about 10% since then, the housing prices were still 20% overpriced at the end of 2012.

Today I decided to look at things from another point of view. 

I took all the data from the period 1975 – 2011 that I could get. The used data is courtesy of the Central Bureau of Statistics (www.cbs.nl), the University of Amsterdam (UvA) and www.gemiddeld-inkomen.nl (i.e. average income) : 
  • Average Mortgage Interest Rates (adjusted for average Mortgage Interest Deduction (MID)) 
  • Official Inflation rates (by the Central Bureau of Statistics) 
  • Average Housing Sales Price per year (UvA and CBS)
  • Average Income (www.gemiddeld-inkomen.nl)
  • Housing sales numbers (CBS|only since 1995)
I started with the average housing price in 1975 and I divided it by the average income, multiplied with a factor based on the deviation of the at-the-time interest rate from the highest interest rate over the whole period (adjusted for mortgage interest deduction).

I used this interest factor, as in times with low interest rates people can borrow more money than in times with high interest rates, based on the same income.

The formula looks something like this:

X = Housing Price 1975 / Average interest rate adjusted income 1975 (Average Income 1975 x (highest MID interest rate [1975-2011] / interest rate 1975)).

Then I divided the average income and the Average housing price [1975-2011] through the aggregated inflation rate to get an inflation adjusted income and an inflation adjusted housing price.

Using the earlier calculated multiplier X, I calculated the realistic housing price with a factor for every year from 1975 - 2011, based on the thesis that people in 1975 paid a price for a house that matched to their income. 


Hence, the multiplier X represented a reasonable proportion between the housing price and the income, adjusted for the interest rate at the time.

Average interest rate adjusted income [year] x [multiplier X] = realistic housing price [year]

Then I matched the real average housing price in a year with the realistic housing price that I calculated based on inflation corrected income, interest rate and the multiplier X.

I must admit that I don’t know if this method is scientific, as I’m not a econometrics scientist.
However, for me the method seems reasonable and defensible.

Here are some preliminary conclusions:

  • The inflation adjusted income rose by only €470 in the period 1975 – 2011 (see following chart). 

Inflation adjusted income 1975 - 2011
Data courtesy of : www.cbs.nl and www.gemiddeld-inkomen.nl
Chart by : ernstseconomyforyou.blogspot.com
Click to enlarge
  • There is a negative correlation between the inflation-adjusted housing price and interest rate. This works much stronger than I expected. I dare to say that scarcity on the housing market doesn’t play so much of a role.
  • Although the inflation adjusted housing price in 2011 is about twice as high as in 1975, this can be totally accounted for by the much lower interest rates of today. In 1975 the average interest rate on a mortgage in The Netherlands was about 9%, today it is about 4.5%. When the inflation is pulled out of the equasion, the influence of the interest rates on housing prices is enormous (see following chart)
Inflation adjusted housing prices 1975 - 2011
Data courtesy of : www.cbs.nl and the University of Amsterdam

Chart by : ernstseconomyforyou.blogspot.com 
Click to enlarge
  • However, it takes the housing market a few years to react to adjusted interest rates, especially when a recession or a crisis just took place before the interest adjustment.
  • The Mortgage Interest Deduction dampens the effect of higher and lower interest rates, as the interest rate is about divided by two.
  • After a crisis took place, the realistic housing prices are often much higher than the real, inflation adjusted housing prices. This situation can last for five to seven years (see following chart)

Inflation adjusted housing prices  vs realistic housing prices 1975 - 2011
Data courtesy of : www.cbs.nl, www.gemiddeld-inkomen.nl and the University of Amsterdam

Chart by : ernstseconomyforyou.blogspot.com 
Click to enlarge
Main conclusions:

  • In the period from 2006 – 2010 the housing market was overpriced.
  • From 2007 – 2009, the housing price was massively overpriced (25% in 2008). This explains why the housing market sales collapsed in 2007 and didn’t pick-up until 2010 (see the sales line in the last chart).
  • At this moment the housing market is not overpriced anymore. The real inflation-adjusted housing price is exactly equal to the realistic housing price, if my calculation method is correct
  • However, I expect the real housing price to be below the realistic housing price for at least 5 - 8 years. This happened too in earlier crises. Besides that, this was an extraordinary crisis with probably longlasting side-effects.
  • On the other hand, I don’t expect the housing prices to drop much further than about 5 - 10% from today’s prices, as they seem to be the right price. The deep crisis, however, and the rising unemployment makes this very hard to predict.


I must admit that I am truly puzzled by the results of my research. Therefore I called this article 'Ernst’s confessions'.

One of the biggest scientific errors that can happen is that people try to adjust the data to their convictions, instead of adjusting their convictions to the results of the data.

Today, I try to do the latter, by admitting that my stance on the overpricedness of the Dutch housing market was correct in 2008 - 2009, but is now not correct anymore. I learned an important lesson today.

7 comments:

  1. Hi Ernie:

    How do you think the following factors might relate to the housing prices in NL?

    1)The budget cuts that are being made virtually all over Europe ( less money coming into the dutch economy, internally and also due to expected decreasing exports )

    2)The competition from emerging countries, causing many companies to take jobs somewhere else, not many new "vast contracts", specially among the young people who are the "fuel" of the housing market. (also the demography plays a role here)

    3)The fact that until now ( except some recent changes in the aflossing vrij mortgages ) everything has been aimed to increase leverage more and more. I dont think there is much more they can do to sustain this level of prices, Just check funda.nl and you will see that the drop in price is quite big, and still, the only part of the market where there are some sales are the cheapest houses, mostly. Basicly everyone went in the market during the boom, now there is nobody left to buy.

    4)People will have to assume losses, it can be now, or it can be later after 30 years, when they are not entitled anymore to MID and pay the rest of their loan with no deductions and using whatever pension they have left for it.


    The only sector which profits from this system is the banking sector, which simply is able to take more money out of the taxes we all pay. Or the people who sell their houses and go rent some place/leave the country.

    Besides, the more amount of resources you invest in your own house, the less money that is left to go out and have a drink ( less jobs for the local businesses ), or to invest in some idea you have to create your own business as well (Since you are already deep in debt).

    This last paragraph results in more and more negotiating power for international companies which do business in this country, which are actually the biggest contributors to the exporting capacity of this economy and already have a very friendly tax treatment ( Hecen the tax burden falls mainly on the average citizen ).

    I honestly believe prices will not stop falling for a long time, and that the only "attractive" way of buying would be going for the cheap houses, so the loss you might have is compensated for the rent you do not have to pay. Even though buying has disadvantages like losing your negotiation power against your employer ( if they offer you a nice job 200km away, it is not easy to accept it... )

    High prices are socially not good, in my opinion.

    One more thing: If prices and interest rates are strongly correlated ( in a negative way )... And prices keep falling when the interest rate is quite low... what can we expect whenever they start rising ( maybe tomorrow, maybe next year, maybe in 5 years)

    ReplyDelete
  2. Hello again!

    I am the anonymous from comment 1 again:

    One thing I forgot, What happens if finally the EU needs to bail more countries out? The situation in countries like Spain, Portugal, Greece, etc is deteriorating really fast, and I believe it is very unlikely they are able to repay their debt. In that scenario, I think that the credit restrictions in the whole Europe would be quite bigger than now. And at the end of the day, the price of houses is made up for whatever the bank is willing to lend, since there will always be someone willing to accept their conditions.

    In my humble opinion, there are many uncertainties, so in my case I will keep renting and with my suitcase packed just in case things get very wrong here. I will not be rich, but at least I will sleep nicely!

    Thanks for reading and keep up the good work with your blog!

    ReplyDelete
  3. Do you need a business loan ?? apply now
    We are lending organization and had the highest profit in the lending sector and as part of our humanitarian services we are offering out loans to all locations with 3% interest rate ,if interested apply now and do business with the right people contact us via Email: infoloanfirm8@gmail.com even Blacklisted can apply for the loan

    ReplyDelete
  4. Do you need an urgent loan today? Are you thinking of clearing debt or you have intentions of starting a new business? We offer loans at low interest of 3% for personal and business purposes! We also offer easy approval and fast transfer as guaranteed by our insurance company. Interested persons should contact Mr Carroll Walker with Email: infoloanfirm8@gmail.com

    ReplyDelete
  5. I want to thank Mrs Carroll Walker loan firm for giving me a loan of $37,000.00. If you need a quick loan avoid being scammed by fake lenders and apply from a genuine loan company I told myself that any Loan lender that could change my Life and that of my family after being scammed severally by these online loan lenders, I will refer the person to Mrs Carroll Walker loan firm who gave me and my family happiness, although at first I found it hard to trust her because of my experiences with past loan lenders, I was in need of a loan of $37,000.00 to start my life all over as a single parent with 2 kids he is indeed a GOD fearing woman, working with a reputable loan company. If you are in need of a loan and you are 100% sure to pay back the loan please contact her on E-mail infoloanfirm247@gmail.com

    ReplyDelete
  6. Need a Debt Loan To Pay Off Bills?
    Take control of your debt today
    Available Now Business Expansion Loan Offer?
    Do you need a loan to pay off Bills?
    Do you need a loan?
    Do you need Personal Loan?
    Business Expansion Loan?
    Business Start-up, Education,
    Debt Consolidation Loan
    Hard Money Loans
    Loan for any thing ?
    We offer loan at low interest rate of 3%
    Loan with no credit check,
    Email us: financialserviceoffer876@gmail.com
    Call or add us on what's app +918929509036

    ReplyDelete
  7. HOW I GOT A LEGIT LOAN @ 3% INTEREST RATE with ( infoloanfirm8@gmail.com)

    IF you are looking for a loan amount of little or huge amount between $5, 000USD to $100,000.00USD @ 3% interest rate, you will have to contact Carrol Walker Loan Firm Company ( infoloanfirm8@gmail.com). he help me with funds urgently when i was desperate in need of money to payoff my debt after my husband medical expense and more funds assistance to pay our mortgage and refinance my business. I read about Carrol Walker on how he have help lots of person and he attend to me urgently when i contacted and explain my situation to her. he has help lots of persons that i refer to her too. Contact her now with VIA EMAIL: infoloanfirm8@gmail.com

    ReplyDelete

Blogoria.de

Blogarchief