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Monday, 14 October 2013

During the credit crisis, the household debt in The Netherlands actually increased: is this because the banks raised the mortgage amounts of households with missed amortization and interest payments?!

It happens sometimes that press releases by the Dutch Central Bureau of Statistics trigger me to do some in-depth investigations, based on the historical data in the excellent CBS’ Statline database. This week was such a time. 

Last Wednesday, the CBS brought the news that the household debt in The Netherlands was marginally down at the end of 2013Q2:

The total debt of households and non-financial companies amounted to more than 1.3 trillion euros by the end of June, i.e. 223.7% of the GDP. This so-called private debt-to-GDP ratio was marginally below the level of the preceding quarter (224.0%). This is predominantly due to the fact that the overall household mortgage debt was marginally reduced. The total corporate debt hardly changed.

In the second quarter, the household debt-to-GDP ratio was marginally reduced. By the end of June, the total debt of Dutch households was 127.4% of GDP, versus 127.8% by the end of March. The household debt-to-GDP ratio fell slightly for the third time in a row.

The bulk of household debts consists of residential mortgages. By the end of June, the residential mortgage debt totalled 669.3 billion euros by the end of June, versus 671.3 billion euros in the first quarter. The mortgage debt of households has declined for three quarters now, though only marginally. The mortgage debt has grown substantially between 1995 and mid-2012.

Residential mortgages and total loan amounts households
Click to enlarge
This data and especially the older data that I dug up from the Statline database, brought me in a state of confusion after analyzing. While the large Dutch banks ING, ABN Amro, Fortis and Rabobank, all severely hit by the credit crisis, acted like a fuse in a powder barrel in 2008, these banks were not the only reason for the emerging credit crisis in The Netherlands.

I am still very certain that the credit crisis in The Netherlands has merely been caused by the consequences of people having too much household debt and by the circumstance that people just started to say ‘no’ against the ever-rising housing prices and their ever-increasing household debt portfolio.

They did so, by refusing to buy new and existing houses in the same tempo as before, from 2006 on. This partial buyers-strike initially led to a stalling housing market and eventually to steadily dropping housing prices, at an increasing pace, when the buyers didn’t return to the housing market at all and sellers got into trouble more and more.

When the Dutch exports started to dry up and more and more companies came into financial trouble, due to the strongly diminished credit-supply by the banks and the totally absent consumer-trust, this did the rest: the Dutch economy came grindingly to a halt and unemployment finally soared. This is the ‘official’ story that everybody knows, since the start of the crisis.

What confused me last week,however, when I saw the CBS data from 2006 and further, is that the debt-to-GDP ratio actually increased since the start of the crisis (see the chart):

Household debt vs GDP from 2006Q1 - 2013Q2
Graph by: Ernst's Economy for You
Source data:
Click to enlarge
This happened not only as a consequence of the slightly dropping Dutch GDP, but also due to the fact that the amount of credit itself still rose, until mid-2012. This is strange, in my opinion.

Since 2006/2007 more and more people refused to buy the too expensive houses and since those years, the actual sales prices dropped by 20-30%, when compared to the peak housing prices in 2007/2008. Why did the amount of household debt still rise anyway?

The only reasons that I can think of, are:
  • Either the people didn’t want to give up on their lifestyle yet and started tapping their credit-lines by using all kinds of short-term debt, to continue this lifestyle;
  • Or, both the banks and the houseowners didn’t want to come to forced sales of their houses, when the mortgages were in arrears and their houses were clearly underwater. Instead, the banks raised the total mortgage debt with the missed downpayments and interest amounts. 

Popular forms of short-term debt are: overdraft debt on people’s current accounts, credit card debt, supplier’s debt (i.e. customer cards and customer loans) and short-term consumptive loans. These are the credit-lines that people would normally tap, when they didn’t want to change their lifestyle yet.

What clearly speaks against the first bullet, is the fact that the short-term household debt did indeed drop since the beginning of the credit crisis in The Netherlands. At 2013Q2, this short-term debt was at the lowest level since 2006Q1 (see the chart):

Short-term debt from 2006Q1 - 2013Q2
Graph by: Ernst's Economy for You
Source data:
Click to enlarge
It becomes clear from this chart that many Dutch people indeed changed their lifestyle and tried to live more within their means.

Then, the only and very disturbing conclusion (if I didn’t miss certain financial developments) must be that the banks raised the enormous debt of many houseowners by adding the missed amortization and interest payments. As this household debt is indeed enormous: “only in Danmark, the household debt-to-GDP ratio is higher than in The Netherlands” (source: CBS | see the aforementioned link).

If my conclusion here is true, it doesn’t make sense that the credit crisis will be over soon in The Netherlands: when too much debt caused this crisis in 2008, having more debt is certainly not the solution. Yet, this is what seemingly happened in The Netherlands since 2006. 

When you think that my conclusion is mistaken and I missed some important developments, please let me know via an argumented comment or via an email to the address that you find in my profile. I will cherish your insights.

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