the Netherlands housing system all but guarantees unaffordable housing and a susceptibility to housing bubbles, via:
- ridiculously easy credit, with a third of mortgages guaranteed by the government;
- mortgage interest tax relief and generous subsidies offered to home buyers;
- a dysfunctional rental market that encourages households to strive for owner-occupation; and
- severely restricted housing supply, which ensures that changes in demand flow predominantly into homes prices rather than new construction.
Now it appears the chickens are coming home to roost, with Dutch house price falls accelerating. According to the National Statistics Agency, Dutch house prices fell -8% in the year to July to be down -15% since prices peaked in 2008.These policies should sound familiar to most Americans. Even though prices in the US have already fallen by well over 15% since the peak and caused lasting damage to the broader economy, a couple of these policies remain firmly in place. The mortgage interest deduction remains a hallmark among tax expenditures, favored by a large majority of Americans despite the benefits primarily accruing to the upper class. Easy credit practices that were formerly maintained by the private sector, with encouragement through Fannie and Freddie, are being continued with government guarantees. According to Dr. Housing Bubble:
In 2005 and 2006 FHA loans were only 5 percent of the entire pool. Today, they make up roughly 1 out of 4 originations and reached a high of 30 percent in 2009.Many of these loans are still being provided with a ridiculously low minimum down payment of only 3.5%. Not surprisingly:
eight of the largest US banks now have $79.4 billion in delinquent FHA insured loans. Of this, 83 percent represent government-guaranteed mortgages.Trying to prop up the housing market through increasing private debt may work for some years, but it has proven time and time again to be unsustainable.
Which brings me back to the Dutch story and the following chart:
Out of the top nine countries, with respect to debt-to-GDP, several have already experienced a dramatic fall in house prices. The remaining countries have only experienced mild declines from their peaks so far (Here is an interactive graph on house prices from The Economist). My hunch is that households will not be able to sustain such high debt ratios for much longer. As house prices begin to fall more rapidly, households will be forced to deleverage and the decline in demand will ripple throughout each economy. We have seen this movie play out in the US, Japan, Spain and now the Netherlands. Only time will tell if other countries near the top of this list will fall prey to a similar fate.