Home > financial crisis > Thought for the Dutch: “don’t mention the houses!”

Thought for the Dutch: “don’t mention the houses!”

from Merijn Knibbe

The Netherlands will be next. Everybody is thinking and writing about the problems of Ireland and Spain. Soon, they will be thinking and writing about the Netherlands. Check it out:

The Netherlands
Banking is a relatively large chunk of the Dutch economy. In 2009 and probably also in 2010, Dutch banks received a large windfall profit (1% of GDP, according to the Centraal Bureau voor de statistiek) as ECB interest rates went down while Dutch interest rates did not (or only to a limited extent). One day, this will end.

After 1990, total long term households debt (read: mortgages) increased with about 600 billion Euro, twice 2009 disposable income of households. Twice. During the last decade, these were increasingly ‘interest payments only’ mortgages – people do not build equity anymore. During the last decade, these were increasingly ‘top-mortgages’ of 110% or even 125%. That is: these mortgages were ‘under water’ right from the start. Yes, that did happen, in the Netherlands. It still happens, though 125% is not possible anymore. In Germany, it never happened. Dutch households are ‘exposed’, the 30 to 40 billion a year Mortgage-money boost to the economy which was characteristic for the nineties and the ‘Zero years’ will end (in 2005 the boost was even 54 billion, or about 20% of disposable income of households, according to the National Accounts) will end – it has not jet ended, in 2009 ‘leveraging’ of households still was 25 billions – while real disposable income fell.

House prices
After 1990, house prices increased with about 270%. Corrected for inflation this means a 220% increase.
• Economists ‘explain’ this by rising incomes, low interest rates and rising real rents. But the most significant short term explanation of house prices is, as always and everywhere, hysteresis. The best predictor of prices in a year are last year prices. What does that mean? When people buy a house, the bank looks at their income (which still happens in the Netherlands, standards did deteriorate but not as much as in the USA). But the buyers mainly look at prices of other houses – keeping up with the Van der Veldens. In Germany, where incomes and the like showed comparable developments, prices did not increase.
• Real household incomes did not increase that much (15 -20% after 1970). Lower interest rates, rising house rents and hysteresis did the trick. How?
• I’ve tried a ‘real world monetarist’ explanation (too long to publish in a blog): does the increasing (and after 2008: decreasing) amount of ‘Mortgage money’ available after 1990 explain increasing house prices (Mm*V = PT with V=1, P is house prices and T is number of houses sold)? This increase, made possible by neo liberal deregulation (yes, it is getting boring), does explain the larger part of the price increase. It does not explain the post 2008 price decrease of only 6% (nominal): in the downward phase of the housing cycle, credit restrictions, mainly imposed by households themselves (!) do not cause lower prices but less transactions (the decrease in T being the active part of the equation, I guess). A kind of ‘Minsky moment’ can also happen to borrowers: irrational expectations of the development of the value of houses suddenly change. If the monetary explanation does ‘explain’ the increase, this means that the laxer standards banks used to check income indeed enabled a higher amount of Mortgage-money (a ‘social money’ definition of money, by the way) and larger price rises: demand side inflation. Seems a good explanation of the Dutch-German difference in house price development: ‘it was a credit boom, stupid’. Prices were not just fuelled by income, but also by irrational expectations of permanent income including expected increases of the value of houses (and yes, we can put in some Georgism. Real building costs of houses did not increase that much, the bubble was very much a land-prices bubble).

Government debt
Dutch government debt has increased quite a bit after september 2008, not because government deficits were high (2008 actually shows a surplus) but because the government bailed out some banks and nationalized some others (there were reasons to do this, by the way). A part of this money has already been returned (with a handsome profit). At this moment, it is however likely that quit a bit (tens of billions of Euros) will never be show up again, it evaporated.

International debt
The Netherlands always used to have low net international debt, as government deficits were financed by domestic (pension) savings. Comes in: neo liberal Zeitgeist. Pension savings were not invested in Dutch debt anymore, but in USA mortgages and international shares… Yes, that was my money. At the same time, mortgage debt increased with ever laxer limits. As a result, Dutch international debt is almost at par with Irish and Spanish debts.

Local government
AFter 1990, sale of land increasingly funded local government expenses. Short story even shorter: cities like Amsterdam and Eindhoven are already in (big) financial trouble as they can not sell land anymore.

Even more neo liberal zeitgeist
Just today I read in the newspaper that the obligatory ‘Odysseus and the sirens’ collective insurance building companies always had and which enabled them to pay their employees part of their income when the weather goes really bad has been abolished. ‘That can be left to the market, private companies will step in’. Short story short: individual building companies listened to the sirens, did not insure themselves, used the money to cover their losses (building is in a deepening slump, at the moment) and as soon as it the weather goes bad building will stop, payments to the building companies will be postponed, liquidity runs out as they still do have to pay part of the income of their workers and they will go bust – while the building projects as such are profitable! Peter Radford asks: what do we tell our students? Should we teach them Greek tragedy? No, this is in fact more like a Laurel and Hardy comedy – you can see it coming though it makes you cry, not laugh. And it’s, just like the consequences of laxer and more flexible lending standards, and exapmpe of the Eggertsson/Krugman ‘paradox of flexibility’.

The housing market.
In the Netherlands, there has not been a housing boom, partly because of rather strict regulation (it’s a densely populated country). There has been an ‘offices’ boom. House building and office building both are in a deepening slump, right now. House building will, one day, recover – office builders have to switch to the demolishing business. When it comes to sales of existing houses, ‘real’ turnover has decreased with forty percent and is declining. Interestingly (and consistent with Georgist ideas), real prices are at this moment down only about 8%, while sales are down 30% (and declining). As the stock of houses for sale continues to increase, house prices will in the end go down – and more and more mortgages will be ‘under water’. Especially more expensive houses are a very hard sell at the moment. Real estate brokers are complaining that especially people who inherited a house do not want to lower prices: a morbid stickyness of prices. Divorces, disability and long term unemployment will however force prices down.

What does the government do?
They do not speak about it too much, but all kind of signals show that especially the Dutch Central Bank (DNB) is keenly aware of the problem. The government/DNB want to restrict the right of people with a median income to rent a house (yes, you just did read that), they want house rents (already the highest of Europe) to increase, workers have to pay larger amounts into their pension funds, the tax deduction of mortgage interests has to be kept intact at all cost (even a higher government deficit, nothing else escapes austerity but this item)– I expect that there already is some kind of plan B which will force the Dutch pension funds to finance exploding government deficits when a milder, but in the case of a double dip still very serious, Irish scenario sets in (even more bailing out of banks and increasing interest levels on government bonds). Plan B is probably as follows: the DNB already forces Dutch pension funds to use an artificial, uber-low ‘Fantasia’ interest rate when they calculate 2040 reserves. It’s in fact the lowest rate since 1560, when published Dutch interest series start. This, of course, causes 2040 reserve-projections to be alarmingly low, which causes the DNB to force pension funds to increase (obligatory) worker payments into the funds. This increases funds which, in case of an Irish-style emergency, are available to, directly or indirectly, bail out the banks (which officially do now own the DNB, but, well, you know). I’m in favor of ‘conservative’ accounting. I’m even of the opinion that a large part of the present problems are the result of accounting that was not ‘conservative’ enough – there really was no room for bonuses and conservative business accounting would have shown that. I do agree that pension funds do have to use an artificially low interest rate to calculate future reserves. But at this moment there are plenty of possibilities in the Dutch capital market to make (very) long term loans (up to fifty years) at a much higher interest rate than the ‘Fantasia’- interest rate – even conservative rates must be realistic.

What should the government do?
Almost nothing. Pension fund money must not be used to bail out banks, directly or indirectly. Mortgage interest rates already contain a ‘risk premium’. Yes, this premium has been wasted as ‘bonuses’ and high banking wages – not my problem. Let the banks go bust (or let them at least shrink and wither away, starting today). People should get the right to (partly) refinance (part of) their mortgage debts by borrowing the money they already paid to their pension funds at a rate which is lower than what the banks charge for mortgages but which is much higher than the ‘Fantasia’ interest Dutch pension funds are supposed to make. But that’s not up to the government, that’s up to the pension funds. (This of course sounds good, but this will sometimes require that pension funds, as long as the bank mortgage is not yet paid down in its entirety, get a lien on pension rights)! There are however things which the government can do. In case of emergency, the 6% sales tax on houses has to be abolished – which will of course decrease government receipts. And they might ponder about a tax deduction for marriage counseling, to lower the amount of divorces. Prepare for it.

I do not want to be too pessimistic. During the 2008 panic, the then minister of finance, Wouter Bos, with his team managed to beat the markets by outsmarting them, outrunning them (almost literally, putting in a string of 48-ers, 48 hours that is), outfunding them and out-knowledging them. It can be done! One day, you leave the office as an overpaid employee of a private bank, literally the next day you return as an overpaid employee of a government bank whose job is suddenly at stake. He bought us time, which the Netherlands used to sort out the mess and to restructure banking and domestic and international debts! Or – did we? Indeed, I do not want to be pessimistic, but….

Beware: I’m as a rule not in favour of state banks. But sometimes, that can be the better solution. And I did learn that the payment system is indeed something like a ‘public good’, like the drinking water and sewer system in the Netherlands (which is working close to perfect, by the way – while the english are only starting to replace their Victorian sewer system, we have already largely replaced our system from the fifties. Three years ago, I happened to be in Victorian station in London at the exact time of the ‘torrential downpour’ – it did give me a smell of the imperfections of the english system).

By the way: this was a Georgian, real world monetarist, ‘topsy turvy’, institutional, social money, irrational expectations, simple math, economic history, national accounting, market analysis of the Dutch situation. I did leave out neo-classical economics – can’t use it.

  1. November 27, 2010 at 3:41 pm

    Excellent article! I will save it and refer to it. In my judgment, the best policy for the Netherlands is to bring their VAT down to the EU minimum, and shift all other sources of public revenue to pollution charges and land-value taxation. The Dutch could then rapidly grow their way out of debt. Another radical proposal would be for The Netherlands to quit the euro and replace it with a new Dutch guilder, and then give every resident 10,000 new guilders. Money to the people.

  2. Alexey Kuzmin
    November 28, 2010 at 8:12 am

    It seems to me You ignore the fact of the wide-spread grey economic activity in the 90s. It means that many have had some extra money not only somewhere in Lichtenstein banks etc but to large extent in cash before introduction of Euro. As gulden to Euro conversion was subject to demonstration of legal source of origin of these savings, most of this money found itself bound to the real estate market.
    Otherwise the price growth curve of the real estate with time will not have this specific shape.
    Moreover, imho just these disproportions led to the price growth (price of my beer somehow managed to double: it was 1 gulden, it became 1 Euro in 2 to 3 years – just when something of the kind happened to real estate prices) – and caused political discontent of last years (EU Constitution referendum failure and delegitimization of the political class)

  3. merijnknibbe
    November 28, 2010 at 2:19 pm

    @ Alexey,

    1) On perceived and measured inflation:

    Click to access wp0005.pdf

    There are many different kinds of inflation. And I do not know which bar you were visiting in 2000, but when some fellow students and me were in Luxembourg city in the spring of 1980 we were surprised by the low price of beer: one guilder (in fact: 20 Belgian francs, which was about one guilder).

    2) But whatever rate of inflation you use (GDP deflator, Consumer price index, the nominal costs of building (without land)): prices of houses increased much, much faster that inflation. But I have to admit: I did not check beer price inflation.

    3) And yes, there was some laundering of grey, non-VAT money around 2001 (in my family, there are quite some small companies – no connection intended). But the house price increases dated from long before 2001 and continued afterwards – in my view mainly caused by deregulation of the mortgage market (when (among others) Royal Bank of Scotland entered the Dutch market and started to sell very high mortgages (more than 4,5 times total income of a couple, while 4,5 times income of the main earner used to be the norm), other banks were forced to join this strategy).

  4. November 28, 2010 at 3:33 pm

    Merijn, ik geloof dat men in Nederland hard bezig is met een cover-up van de ware verliezen, niet met het opschonen van de bancaire sector. Lees de brief van de rekenkamer naar de tweede kamer waarin ze stellen dat ze ruim 2 jaar na dato nog steeds niet bevoegd zijn om dochtermaatschappijen van ABN AMRO te onderzoeken. Ik ben momenteel ook bezig met een onderzoek naar de NHG, de bevindingen uit dit onderzoek indiceren ook dat er geenszins de wil is om de banken op te schonen, in tegendeel, risico wordt op grote schaal overgedragen van de banken naar de belastingbetaler.
    Overigens ben jij zo’n beetje de eerste econoom die ik ben tegengekomen die een serieuze analyse geeft van de situatie in Nederland (ik begon me al tamelijk eenzaam te voelen!).

  5. merijnknibbe
    November 28, 2010 at 10:31 pm

    @Jesse Frederik

    1) Quite a shock that the Rekenkamer (the controller of the Dutch government) has to write a letter to the parliament to get access to doughters of ABN-AMRO, a nationalized bank…. There might indeed be a cover up – and I do understand why:

    Some additional information I found:

    1) Moody’s just downgraded a (tiny) part of Dutch securitized mortgages.
    2) “The proportion of mortgages with LTV ratios of more than 100% increased from 15% in 1990, to more than 70% by 2001-02. In 2006, the average LTV on new first-time buyer loan was an astonishing 144%. In 2007, the Code of Conduct for Mortgage Lenders was tightened to reduce the risk exposure of Dutch lending institutions”

    – to reduce the risk exposure of Dutch lending institutions…. –


    3) Why am I the only Dutch economist crying wolf about the housing market? One reason has to do with economics. Read Dean Baker on this blog: some USA economists still do not believe that there has been a housing bubble in the USA as their models do not show this: disregard reality, disregard other models with which you’re not acquintanced.. When I compare myself with Dutch economists writing on the housing market, my model is, though less formal, more complicated. Dutch economists generally only look at the income and expenses account of households (i.e. at variables like income, interest rates and the like). I also look at the balance sheet and the liquidity sheet – and, being an economic historian, I’m used to try to integrate these into a coherent narrative. Especially the last thing is quit alien to many economists. They are used to present results, not to analyse, discuss and integrate these results.

    There are of course also economists who do look at balance sheets and liquidity sheets. But these are often not too interested in income-related variables. Take Sumner on inicome related models of aggregate demand:

    “Mishkin’s Monetary Economics textbook defines AD in two different ways; once as a rectangular hyperbola, i.e. a given level of NGDP, and then again using the approach preferred by Keynesians, which I have always found to be so confusing and illogical that I have never bothered to try to figure it out. (Of course this creates problems when students ask me to explain the “three reasons the AD curve slopes downward.” I usually tell them to ignore that section of the principles text, and assume AD is a given level of nominal aggregate expenditure.)”

    I do think that economists have to stop dissing each other and have to start learning from each other. Good 27 november Sumner blog entry, by the way.

    • November 28, 2010 at 10:54 pm

      The latest figures from DNB (Dutch Central Bank) indicate that for the first time since the 1980’s people are starting to pay down their debts, mortgage debt declined from €607 billion to €605 billion in the third quarter. Also note the comments by parting president of the AFM, Hans Hoogervorst, who said that 15% (!) of all Dutch mortgages have negative equity. Imagine what will happen if prices really begin to decline!

      Last friday I’ve met with Pieter Lakeman to discuss my research with regard to the ‘Nationale hypotheek garantie’ (National mortgage insurance). There’s a real good chance we will sue the rating agencies as well as SNS Reaal for false warranties with regard to it’s NHG RMBS portfolio. So further downgrades are in the making. I personally hope that this will slow down the massive expansion of NHG guarantees, which basically serve as a large transfer of risk from financial institutions to the government, as well as a vehicle for defrauding investors.

  6. Merijn Knibbe
    November 29, 2010 at 8:35 am

    Keep on the good work! But first read the next op-ed, from a former chief economist of the IMF.


    It’s dated March 18 2010, but the (Irish) tragedy unfolds as he describes it. As long as banks can act

    * as if their debts are our (i.e. the taxpayers and society’s) debts and that their risks are our (i.e. the taxpayers and society’s) risks
    * take risks with this ‘moral hazard’ in mind while at the same time paying overly high salaries and literally paying hundreds of billions of bonuses (according to the newspapers: 17 billions in London, 117 billions and rising in the USA)
    * while at the same time take home pay of (in this case) Irish government employees is decreased with 20% to pay of the (nationalized) debts of the banks, while these employees still also have to pay their mortgages…

    there is a fundamental problem in our economy.

    • Alice
      November 29, 2010 at 11:41 am

      Global banking empires where speculation has – well I was going to say taken over but really it has taken a millions and millions of other peoples money and concentrated it in the visible and obscene excesses of their employees. They have committed such fraud and speculation on such a grand scale that it is almost incomprehensible and has now bankrupted entire nations and their governments – while the same empires continue as before – dictating who will and wont be lent money, who will and wont be downgraded.
      There is more than a fundamental problem in our econmy – there is massive failure of the financial system.

  7. December 6, 2010 at 1:20 pm

    The ignorance of experts is appalling. They still talk about house price increases when it is the plot under the houses that goes up in response to rising demand.
    Since land supply is inelastic (they ain’t making it no more :-() its price is purely demand created (land has no cost of production).

    Take the yearly increase of land values from the private owners, who did nothing to create it, and use it to supplement public revenue.
    As well as reducing the need for taxing earned income, Land Value capture would also cut the ground from under property speculation and housing bubbles.

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