RWER issue 55: Merijn Knibbe
Why did Dutch economists get it so wrong?
Merijn Knibbe [Wageningen University, Netherlands]
As late as February 2010, at the time when it already had exploded, Dutch economists denied the existence of a ‘housing bubble’ in the Netherlands. The reasons for this denial seem to be an unwarranted trust in formalized economic models as well as econometric estimates, the neglect of basic historical, comparative and statistical information as well as a curious lack of knowledge about ‘sate of the art’ ideas and models, let alone ‘heterodox’ ideas. This paper examines the failure of Dutch economists as a means of answering two transnational and ultimately theoretical questions:
- Is it possible to develop a kind of analysis which enables us to identify housing bubbles in an earlier phase, and
- Do economists when looking for housing bubbles look at the right variables and in the right way?
Is there a housing bubble when, as happened in the Netherlands between 1986 and 2007(data from Özdemir and De Ward, 2005 and Centraal Bureau voor de Statistiek (CBS), http://statline.cbs.nl/statweb/?LA=nl; http://www.woningmarktcijfers.nl):
- loan-to-value ratio’s rise to unprecedented heights;
- loan-to-income ratio’s rise to unprecedented heights;
- mortgage debt rises from about 100 billion euro in 1993 to over 600 billion euro in 2009 – and continuous to increase up to January 2010. November 2010 saw the first drop in decades;
- real house prices rise about 150% in 21 years (1986-2007);
- a fast increasing share of new mortgages consists of ‘interest-only’ mortgages or even ‘top mortgages’ of up to 125% of house value and even higher;
- 2009 mortgage debt per household is the highest in the world;
- 2009 housing costs are the highest ever and the highest in Europe;
- real house prices fall 8% in two years and continue to fall (October 2010);
- the number of transactions on the housing market falls about 40% compared with 2006 and continues to fall. October 2010: was minus 12% compared with 2009;
- cities like Amsterdam and Eindhoven run into major problems as they can’t sell land-with-a-building-permits anymore – and have to introduce draconian cuts in their infrastructure budgets;
- ‘Theoretical selling time’ (number of houses for sale divided by average sales per month) increases to 48 months for more expensive houses and to 24 months for median priced houses;
- construction output falls 20% in a year;
Meanwhile nothing of the kind happens in neighboring Germany? According to Dutch economists there is and was, in spite of all these disturbing signs, no housing bubble in the Netherlands.
You may read the whole paper at: http://www.paecon.net/PAEReview/issue55/Knibbe55.pdf