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Sunday, 15 April 2012

Ernst's confessions: Letter to an anonymous reader

This post is a reaction to the two comments that have been put by an anonymous reader at last Friday's post of April 12, 2012. 

I will print these comments integrally here:

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 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)

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!

Hi Anonymous,

Thanks for your extensive comments. People like you make blogging such a nice job to do. Although I not agree with everything that you write, it is good for some mental gymnastics.

I will do my best to answer your questions with this comment. I will put this in a separate post, as your comments are very interesting for all my readers.

I had the strong gutfeeling that since 2008 we had been creating a bubble of epic proportions in The Netherlands. The average housing prices had risen from 100% in 1995 to 270% in 2007. Since then these prices had only been dropping mildly (about 10%). I reckoned that we still had about 20% to go.

Last Friday, I wanted to figure out exactly how much houses were overpriced in The Netherlands. To my huge surprise, the housing prices didn’t seem overpriced anymore, when I took the inflation and the still extremely low interest into the equasion. Compared to 1975, it was just as easy or hard to buy a house in 2011.

For me, my research was like a slap in the face. How could this be? What I also noticed from the data, however, was that in times of crisis it took a long time for housing prices to get back to the ‘realistic level’ again.

Therefore my opinion is that, although houses are not technically overpriced, in practice the prices will drop by about 10-15% in the coming 5-10 years, as it takes much time for people (and for banks and authorities in this case (!)) to get the crisis out of their system. The reduced lending possibilities will make the housing prices drop, but not by the landslide 20-30% that I expected before.

Concerning your first comment.

1)    The budget cuts will definitely have a deflatory effect on Dutch society and thus on the housing prices in The Netherlands. Domestic consumption will be down, export within Europe (the PIIGS) will be down too and unemployment will be up; in my opinion by 3% at the end of this year. The zero wage increase policy that has been advocated by the employer’s associations and by the cabinet will do its destructive work, further reducing consumption. So 2012 will be a bad year for the housing market, just like I said before. Friday’s investigation will not change much about that.

2)    Ditto; in the coming two or three years, the sometimes dire situation of youngsters will have a further deteriorating effect on the housing market. However, there is a 'but'. The aging proces in The Netherlands will make labor more scarce in the longer run (5 – 10 years), as not everything can be outsourced to the low wage-countries.

Today’s youngsters, when they will manage to stay afloat during the current difficult years, will definitely receive fixed contracts again in 5 – 10 years. Temporary contracts, as you know, work in two directions; in bad times it works for companies to get rid of their excess workers easily, but in good times, it makes it much easier for people to return to job-hopping. Companies that want to prevent that from happening with their valuable personnel, offer their people fixed contracts again.

3)    I agree with you on the leverage part. There has indeed been quite some leverage during the last years; especially among the banks that delivered excess mortgages to people, only on the idea that it was a riskfree operation with the ever rising housing prices in The Netherlands. These bankers have been morons, as far as I’m concerned, bringing people and their own banks in all kinds of trouble.

The Aflossingsvrije Hypotheek (redemption-free mortgage) is a possible weapon of financial mass destruction, especially in times when the interest goes up, as it prevents people from paying their mortgage back like they should. When mortgages of people need to be rolled over and the interest rose in the meantime, those people can be in a bad financial situation as they have to pay much higher interest amounts than before.

Therefore I do expect the housing prices to drop in the coming years ( to the earlier mentioned 10-15%).

However, you should not forget that there are still enough people left that want to buy a new house and can afford it too. People like me, that bought their house some time ago for a decent price, lived quite economically in it and didn’t use the mortgage as a slot machine to buy all kinds of unnecessary luxury stuff. People that saved money for a rainy day and don’t have any financial problems whatsoever.

For these people it is a quite good time to buy a house. Houses have become cheaper and with some firm negotiating, the price can still drop substantially before the contract is signed. If you are patient and not in a hurry to buy a house, these are wonderful times.

4)    People that sold their house in 2003-2007 and want to sell it now, will definitely have to accept some losses. However, I’m not so sure anymore about people that can wait a little longer, even if they paid a ridiculous price. If The Netherlands (Europe) follows the Japan scenario with low interests for a long time and the inflation does its job, the prices will go up again in due course, especially when the economy returns to some form of growth. Please remember, bubbles are a temporary phenomena, but even economic slumps will blow over one day. If you are not in a hurry and you can pay your mortgage, everything will be fine in the end.

I disagree with you that the banking sector profits from the current situation. The banks have a Damocles’ sword hanging above them, when large groups of people get in arrears and need to sell their house in a foreclosure. The banks would have to write off on their assets and that is the last thing they want currently (Basel III).

The real people that profit are the municipalities, as they receive real estate taxes on an excess taxable capacity (i.e. the overrated value of the house).

It is definitely true that you can’t spend money on the good things in life, if you have to pay much of your disposable income on your mortgage. This is indeed bad for consumption from both a micro and macro point of view. However, some people start their own business just to get out of financial trouble. 

If they have special skills and have the will-power to succeed in starting their business upon these skills, their financial trouble can just be the last push they need. I think that more successful companies have been founded in bad times, than in good times.

I agree that the international companies have very much (too much?) power already and receive extremely favorable corporate taxes in The Netherlands. I don’t like at all that my country has turned into a tax haven for large corporations.

Nevertheless, this will not change with the current rightwing government and even when the next government will be a truly leftwing government (CDA/PvdA/Groen Links), I seriously doubt if they will change this tax policy. It is like sponging off other countries in Europe, while making some good money in the process. I dislike it, but it is lucrative business for The Netherlands.

One more thing, if you buy a house you should buy it to live in it. Me and my wife are already living for 12 years in our house and this time passed by in a jiffy. A house is not an investment, but it is a means of living. You buy or rent one that you can afford and if you want and can afford a bigger one in the future, you can buy or rent that then. Please don’t buy a house to make money on it.

When you buy a house for a sensible price and your work moves 200 km’s away from you, you can always sell your house for the same reasonable price. However, if you ask too much money, you won’t sell it. Period!

My research convinced me that there is a strong negative correlation between prices and interest rates; the basic income of people didn’t change much over the last 35 years when you deduct the inflation rate.

Therefore, if the interest rate goes up, the price of housing will go down one or two years later. But at this moment, the housing prices might stay low too for at least the coming five years, in spite of the very low interest rates. This is caused by the heavy credit crisis that we are in, currently. 

However, if the interest rate stays about equal (and according to the plausible Japan scenario it might), then the housing prices will not drop for more than 10-15% in the coming five - ten years, I presume.

Concerning your second comment

The situation in the PIIGS gives me a migraine headache, as you might have noticed reading my other blogs. As long as the rest of the EU does not do anything to change their economic situation and remains treating those countries are pariah states, the EU might implode eventually.

However, if especially Germany and The Netherlands realize that their excess exports, their ‘beggar thy neighbour’ policies and their banks have been at least half of the problem and stop nagging about these countries, but instead start helping them, Europe might be fine eventually.

The combined economic power of the EU is still the biggest power in the world by a landslide, by GDP. If we use this enormous power to help each other, the EU will only become stronger. Look at West- and East-Germany 20 years ago and look where the country is now; on top of the world.

So there is no reason to be too pessimistic about Europe or The Netherlands, but please remain renting if this makes you sleep better at night.

And thanks for your wonderful comments.



  1. Hi Ernst! Just wanted to thank you for answering my questions in such a detailed way. I am very interested in the development of this market since I have been in this country for almost 2 years now. I also live close to the southern border of the country, so living in Belgium could be an option for me too. However, I still prefer to rent since I believe I am too young to "tie" myself to a certain area. Will keep reading your blog! Keep up the good work!

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