EUROPEAN ECONOMY. The housing market in the Netherlands. Windy Vandevyvere and Andreas Zenthöfer. Economic Papers 457 June PDF

EUROPEAN ECONOMY Economic Papers 457 June 2012 The housing market in the Netherlands Windy Vandevyvere and Andreas Zenthöfer Economic and Financial Affairs Economic Papers are written by the Staff of the

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EUROPEAN ECONOMY Economic Papers 457 June 2012 The housing market in the Netherlands Windy Vandevyvere and Andreas Zenthöfer Economic and Financial Affairs Economic Papers are written by the Staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author s alone and do not necessarily correspond to those of the European Commission. Comments and enquiries should be addressed to: European Commission Directorate-General for Economic and Financial Affairs Publications B-1049 Brussels Belgium This paper exists in English only and can be downloaded from the website A great deal of additional information is available on the Internet. It can be accessed through the Europa server ( KC-AI EN-N ISBN doi: /26427 European Union, 2012 The Housing Market in the Netherlands Windy Vandevyvere and Andreas Zenthöfer* Abstract The Dutch housing market has been shaped by highly interventionist public policies spanning over several decades. Direct and indirect government intervention in the housing market through spatial planning and land policy, regulation and supervision of housing associations, rent policy and financial guarantees, generous mortgage interest deductibility and other explicit or implicit subsidies have led progressively to entrenched structural problems, which have negative consequences for the economy as a whole. Given the relatively rigid supply, price developments have been determined in particular by fiscal incentives and demand factors, under which innovations in mortgage financing have played a particularly important role, so that, compared to other euro area members, the Netherlands has relatively high levels of leveraged housing wealth. We conclude with possible reforms that would increase the efficiency of the Dutch housing market by addressing distortions in a gradual fashion while still achieving social policy objectives. Key words: The Netherlands, housing, spatial planning, property market, rental market, policy intervention, social housing corporation, rent regulation, rent subsidies, taxation incentives, mortgage interest deductibility, loan-to-value, amortisation, mortgage financing, guarantee scheme, house price developments, budgetary costs, household indebtedness, bank balance sheet, wealth, capital misallocation, labour market mobility JEL classification: E6, G21, H2, H31, H6, R3 * This paper was written under the guidance of Elena Reitano and Ronald Albers. Comments from Servaas Deroose, Jürgen Kröger, Mary McCarthy and Davide Balestra are gratefully acknowledged. Opinions expressed in this paper do not necessarily represent those of the European Commission. 1 Contents Executive Summary 1. Introduction 2. Policy framework 2.1 SPATIAL PLANNING 2.2 RENTAL MARKET POLICY SOCIAL HOUSING CORPORATIONS RENT REGULATION AND INDIVIDUAL RENT SUBSIDIES 2.3 PROPERTY MARKET POLICY TAXATION INCENTIVES PUBLIC MORTGAGE GUARANTEE SCHEME 3. Housing financing arrangements 4. Impact on the Dutch economy 4.1 HOUSE PRICE DEVELOPMENTS 4.2 BUDGETARY COSTS 4.3 HOUSEHOLD INDEBTEDNESS 4.4 REDISTRIBUTION OF WEALTH 4.5 LABOUR MARKET MOBILITY AND CAPITAL MISALLOCATION 5. Future directions for Dutch housing policies 6. Conclusions 2 Executive Summary This paper examines the Dutch residential housing market, which has been shaped by the mutual interaction of a wide array of policies, including substantial direct and indirect government subsidies and fiscal incentives, financial guarantees, zoning regulations and rent controls, as well as by the development of financing instruments with lower amortisation requirements and higher loan-tovalue ratios. Over the last decades this had led to the gradual build-up of significant distortions in both the purchase and rental segment of the housing market, with impact on the wider economy. Low taxation of home ownership and the very generous mortgage interest deductibility artificially raise housing prices, disproportionately favour high-income taxpayers and have ambiguous effects on housing tenure. In the rental segment, rent regulation and the extensive provision of social housing have resulted in a free rental market that represents a mere 7% of the total housing stock, thus limiting its capacity to buffer as an alternative to the regulated rent and purchase segments. Overall, explicit and implicit housing subsidies constitute a sizable burden for public finances; foregone revenues from mortgage interest deductibility alone amount to around 2% of GDP. In addition, through guarantees extended under different schemes to support home ownership, the government has accumulated very sizeable implicit liabilities. Innovations in mortgage financing during the 1990s have played a particularly important role in driving developments in the housing market of the Netherlands, amplifying the impact of taxation policies: the availability of more diversified and lower cost instruments, with longer maturities and more flexible terms, considerably expanded the credit scope of Dutch households, enabling them to take up larger amounts of debt. The leveraging of household and bank balance sheets has increased vulnerabilities of the banking sector, although these are mitigated by a strong net asset position of households and low delinquency ratios in housing debt. In spite of the traditional bias towards housing loans with long maturities, a fair proportion of households have only short interest rate fixation periods. Hence, households could face an increased debt service burden should interest rates rise. Although the current institutional set-up reflects past and present social preferences, the ensuing distortions weigh on the wider economy through negative wealth effects impeding the recovery, inefficient allocation of capital, undesired redistribution effects, lower-than-necessary labour mobility, unduly high household leverage and an increased vulnerability of the banking sector. The prospects for the housing market and the need for policy changes have come to the fore of public discussion, which has intensified in recent years in the wake of the decline in house prices and the even sharper drop in the number of transactions. Against this background, comprehensive reforms, addressing distortions in all segments of the housing market, are necessary to gradually reduce distortions and improve efficiency of capital allocation thus helping to increase economic growth and job creation. This requires a gradual redirection of policies, which would also limit the non-negligible burden on public finances. After reviewing the main policy options which are being considered in the wider debate among economists and civil society, we conclude the analysis of the housing market in the Netherlands by proposing some preferred directions for reform. 3 1. Introduction The housing market plays a pivotal role in the economy: depending on the incidence of house ownership, real estate usually forms an important part of household wealth, housing-related expenses are an important part of household consumption, rental prices are a component of consumer prices, housing taxation can have a profound impact on public finances, and the structure of the housing market can influence the supply side of the economy (for example, labour mobility). Moreover, housing wealth plays an important role in economic and financial cycles, as sharp fluctuations in house prices can threaten economic and financial stability. Housing markets differ from other markets in many respects: they are often highly regulated, they clear at a very slow pace and the supply-elasticity is usually low. This paper looks at the residential 1 housing market in the Netherlands and assesses its impact on the economy. Section 2 explains how the structure of the Dutch housing market has been shaped by government policies, notably taxation, and institutional factors, such as spatial planning and the organisation of social housing. Section 3 subsequently highlights how innovations in mortgage financing have played an important role in fuelling the large uptake of household debt. In section 4 we show that many policy interventions in the Dutch housing market have led progressively to entrenched structural problems, with negative repercussions on the economy as a whole. Compared to other euro area members, the Netherlands has relatively high levels of accumulated financial assets and leveraged housing wealth, reflecting incentives in the institutional set-up to lengthen balance sheets. Wealth effects are thus likely to have a large impact on household spending. Moreover, many of the aims of policy interventions in the housing market could be achieved in a more efficient way. Accordingly, we review the main policy options which are being considered in the wider debate among economists and civil society (section 5) and conclude with possible reforms that would increase the efficiency of the Dutch housing market while still achieving ultimate policy objectives (section 6). 1 The commercial housing market is outside the scope of this paper. 4 2. Policy framework The Netherlands has a long history of public involvement in the housing market and of highly interventionist housing policies with the aims of making good-quality (rental) housing affordable to low income households and of stimulating home ownership. Today, households in both the rental sector and the owner-occupied sector receive substantial explicit or implicit subsidies. Crucial subsidy instruments at the national level are the income-based housing allowance for renters and mortgage relief for homeowners. In addition to these subsidy instruments, the central government also influences housing directly or indirectly, for example through spatial planning and land policy, regulation and supervision of housing associations, rent policy and financial guarantees. In response to public policies, over the past three decades the Dutch housing market has shifted towards higher owner-occupancy. Today, around 60% of the 7.4 million dwellings are owneroccupied, up from 42% in 1980 but still comparatively low on a European scale. By contrast, nowhere else in Europe does social housing dominate the housing market as it does in the Netherlands. Today, social housing represents 33% of total dwellings. The expansion of the social sector up to the mid- 1990s was accompanied by a sharp fall in private renting, which currently accounts for a mere 7% of the total housing stock 2. The following section, after briefly reviewing spatial planning and zoning restrictions (2.1), focuses on policies aimed at the rental market (2.2) and the property market (2.3). 2.1 SPATIAL PLANNING AND LAND POLICY The foundations of the strongly regulated Dutch housing supply and planning were laid in the Housing Act (Woningwet) of The Housing Act responded to the often poor housing conditions prevailing at the time and obliged municipal governments to develop and enforce formal zoning plans, which would facilitate the provision of elementary facilities such as water and sewerage. Government involvement in housing supply was further boosted in the aftermath of the Second World War when the housing shortage caused by the war was magnified by rapid population growth and the move away from communal family living arrangements. In view of a major housing shortage, and initially also in order to keep wage pressures low, the government set rents substantially below the free market level and subsidised the large-scale construction of social rental housing. In the course of the 1980s, the political agenda changed, and the sense of urgency with respect to housing construction waned as outright shortages had been overcome 3. Since then, a process of decentralisation has been underway, and, today, providing social housing is seen less as a task of central government and more a responsibility of the regional and local levels, with municipalities, housing corporations and households as the main players. Municipalities are free to develop their own regulations, but these must comply with the 1965 law for spatial planning (Wet Ruimtelijke Ordening) the aim of which is to concentrate people in urban areas, to preserve landscapes and townscapes and to take into account the special topography of the Netherlands. Spatial plans in conformity with the law provide very detailed regulations affecting the environment, air quality and urban aesthetics, as well as detailed urban development criteria on the types of 2 CBS (2011). 3 Vermeulen & Rouwendal (2007). 5 dwellings that can be built, often including a very restrictive maximum height of houses, limiting the possibility to increase living space on a given lot. This has led to constraints on land supply in suburban areas in a period of growing housing demand and may have been a factor causing house prices to rise. Building regulations and administrative procedures may also restrict housing supply and thus have resulted in a supply that is quite inelastic to changes in the price level of housing 4. At the same time, in a densely populated country such as the Netherlands spatial planning processes have arguably helped manage competing claims on scarce land. 2.2 RENTAL MARKET POLICY The rental housing market in the Netherlands is dominated by the regulated social housing segment. More than three-quarters of all tenants rent a dwelling from a social housing corporation (woningcorporaties), non-profit organisations that have to act on a commercial basis, but are required to use their profits for the provision of good and affordable housing (2.2.1.). Of the remaining 20% of rented housing, a small proportion is owned by pension funds and insurance companies, and the rest is owned by private individuals. Moreover, most of the privately rented dwellings are rent-regulated. The Dutch authorities also subsidize the demand for rental homes. With the exception of a small up-market sector, which represents 7% of all rental dwellings, rents are regulated, with the same legislation applying to both private and social sectors (Table 1). Table 1 - The composition of the Dutch rented housing stock, numbers in millions, percentages shown within brackets, 2009 Landlord Social Private Total Regulated 2.3 (79%) 0.4 (14%) 2.7 (93%) Liberalized 0.1 (3%) 0.1 (4%) 0.2 (7%) Total 2.4 (82%) 0.5 (18%) 2.9 (100%) Source: WoON, SOCIAL HOUSING CORPORATIONS The large social rental sector is the outcome of continuous intervention since the 1901 Housing Act which integrated social housing corporations in the Dutch housing policy and placed them under government supervision. The Housing Act laid down the duties and responsibilities of the housing corporations and allowed subsidisation. In its wake the number of housing corporations, many of them undertakings of municipalities, multiplied. The Social Rented Sector Management Order (known by its Dutch abbreviation, BBSH), states that approved housing corporations have six duties: to house those people who are not able to find an appropriate dwelling themselves; to maintain decent-quality dwellings; to consult with their tenants; to run their financial affairs responsibly; to contribute to liveable neighbourhoods (added in 1997); to provide housing (but not care) for the elderly and handicapped (added in 2001). A major change in the Dutch housing policy occurred in the 1990s, when most of the subsidies on housing construction were abandoned, and housing corporations became, after many years of deregulation, financially independent (Box 1), although still subject to government supervision. This 4 See OECD (2011). 6 policy change led to a substantial decrease in the construction of social housing. While the total amount of social sector dwellings has remained constant since 1995, their share in the total housing stock has slowly decreased from a substantial peak of 39% in 1998 to 33% at present 5. Box 1: Financing of the social housing corporations Until the end of 1994, the housing corporations benefited from subsidies that were intended to reduce costs for renters (in 1994, these subsidies reached a level of EUR 2.3 billion or 0.8% of GDP). In 1995, the government redeemed its future commitment to the housing corporations through a one-off transfer of EUR 16.7 billion or 5.5% of GDP to these corporations. The government wrote off all outstanding loans to the sector and at the same time abolished supply-side subsidies 6. This is known as the 'grossing and balancing operation' (bruteringsoperatie). Since then, housing corporations have to finance themselves. On top of the rents from their tenants, they raise funds through activities in the non-social housing sector (renting to people with higher income, construction and selling of homes) and can raise capital from selling dwellings which are recorded on their books at values far below market values. The government offers housing corporations various costreducing facilities, mainly through the Guarantee Fund for Social Housing (Waarborgfonds Sociale Woningbouw, or WSW). This was set up in 1983 to guarantee loans initially for housing improvement and later for all aspects of social housing. Social landlords pay a relatively low interest rate when a loan is guaranteed by the Guarantee Fund, enabling them to set rents below the market rate. It is estimated 7 that housing corporations benefit to the tune of EUR 300 million on a yearly basis from of lower financing costs. At the end of 2010, the total outstanding sum of these loans was EUR 85.3 billion or 14.5% of GDP. The Guarantee Fund is underwritten by the housing corporations themselves; its funds totalled EUR 472 million in In case of need, the WSW can turn to other corporations for funds (up to EUR 2.9 billion in total). Should this also prove insufficient, the WSW can turn to the government for an interest-free loan. The WSW guaranteed loan-to-woz-values 8 are 50%. Since 1 January 2011 the WSW only provides guarantees for units which are rented out to households with annual income not exceeding EUR Social housing corporations can also obtain loans at favourable conditions from the Bank of Dutch Municipalities (Bank Nederlandse Gemeenten, or BNG), a special purpose public bank with an exceptionally good credit rating, which only lends to municipalities and housing corporations and the Nederlandse Waterschapsbank (NWB). Although the BNG has a limited liability, its top rating can only be sustained under the implicit assumption that the government would support the bank in case of financial problems 9. At the end of 2010, loans from the BNG to housing corporations totalled over EUR 40 billion, or 6.8% of GDP 10. Housing corporations work hand in hand with local authorities to roll out policy initiatives. They are also granted an exemption from corporate tax and can buy public land at reduced prices for the purpose of building social housing. Finally, they receive support from the Central Housing Fund (Centraal Fonds voor de Volkshuisvesting, or CFV), which redistributes funds from financially healthier housing corporations toward weaker ones, to the extent that the need arises on the part of the latter. 5 Vermeulen and Rouwendal (2007). 6 Elsinga et al. (2007). 7 EC(2009) The WOZ-value (Wet waardering Onroerende Zaken, or Immovable Property Tax Act) is the value of taxpayers' main residence that is estimated and reassessed by the municipality every two years on the basis of a large number of factors, including qualities of the dwelling (size of the dwelling, garden, car park, etc.), but also market research carried out by the administration, taking into account transactions and other criteria. The complexity and lack of transparency of the
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