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Debt and home prices: Housing for students in Groningen in particular has gotten a lot of attention in recent years. But issues at the very top of the property ladder are one of the biggest reasons why many people across the north are struggling to find affordable housing even though the Dutch economy is booming.
Faculty of economics and business professor Dirk Bezemer, who is also a columnist for the progressive Dutch publication De Groene Amsterdammer, has been writing for years about how the housing market and private mortgage debt are intertwined, and he warns that the Netherlands is more susceptible to the next global economic shock than basically anywhere else in Europe because of how much private debt is held by homebuyers.
On the current state of the housing market:
Dirk Bezemer: You know that you’re in a bubble after the bubbles burst. So after the fact, you knew that maybe it was a bubble, and so there are two stories about this now. The first is a supply story. So after the 2007 crisis, there was a very long period, about seven years of stagnation in the Dutch economy – two recessions, but seven years of really low income growth. And particularly the construction sector was hit very hard by this. It was a bad time, a very uncertain time to start building projects and development projects in real estate, and so there was very little building done of residential housing, so there is a backlog there. We’ve had a very upbeat economy now for already for a couple of years, so incomes are growing optimism is has been increasing. So households want to buy a house again, so this the demand which has gone up quite dramatically I think but the supply is in there because it’s a long term issue.
On how private mortgage debt destabilises the wider Dutch economy:
Bezemer: Right now, the economy’s really growing fast, and a big part of that is connected to the real estate sector and household sentiment, which is positive when house prices are rising but which can become very negative when house prices fall, and households – you know, you and me – families adapt their consumption to this. So when people feel richer, they consume more and they spend more of their income. And that’s a boost for the economy, but it also depresses the economy when they stop doing that because they are scared of house prices falling.
On whether deficits are a fact of life for modern economies:
Bezemer: For the last half century or more, the government has been running deficits in good times and sometimes in bad times and because a deficit is also a good thing, it means the government spending more than they takes. So do putting more money into the economy than they taking out of the economy and taxation, right? That’s a good thing too. Well depending on what they do. If let’s say they’re building bridges and roads or setting up employment programs maybe or whatever, that can be a good thing. So it could be money spent wisely so that the deficit this year will cost the government, but it will make more money for a lot of people for private parties, households and firms in in the future.
Has mortgage lending changed since the financial crisis?
Bezemer: It’s much harder now to borrow more than a hundred percent of the value of your house, which was normal until 10 years ago. The tax deduction from income is being decreased slowly and I think that must be done slowly so people can adjust their financial planning to it, so that’s a good thing. It could go a bit faster. So on those accounts, good changes are being made. What’s not going well, I think, is how secure our banks are. So around 2013 or 2014, our then finance minister Jeroen Dijselbloem had a very intense public fight with the banks to increase their buffers, their capital buffers, which is the money they could use in the event of a crisis or a calamity, and this went from 3 to 4 percent, which is a minimal increase, but that was already a big fight. But this government has already reduced the minimum level again back from 4 percent to 3 percent. Now there’s all kinds of additional buffers. But the basic one, the minimal one, has gone lower again and it hasn’t increased enough in the last 10 years as it should have. So I’m not so confident that our banking system is shock-proof.
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