Chapter 5. The housing market during the crisis
References [ CPB | General | Scientific ] SummaryAuthors
Machiel van Dijk, Jasper de Jong, Gerbert Romijn & Johan VerbruggenContact: Jasper de Jong
In this chapter
The Herengracht index: the price in real terms of canal residence fluctuates
Housing prices in real terms in USA increased quickly at the start of the century
In the Netherlands housing prices increased less quickly compared to US, Spain, Ireland
What determines the increase of Dutch housing prices?
The Dutch borrow a lot for their residence
References
CPB
General
Scientific
Summary
House prices in the US increased rapidly from the end of the nineties. Given the banks' and potential buyers' expectations of ever-increasing prices, many people with little income or no assets were able to take out a mortgage, often by means of newly designed mortgage types. The result was a housing price bubble that burst at the end of 2006. Many home owners in most of the other wealthy countries have had the same experience. In the Netherlands, however, house prices have remained relatively stable. There has been a slight price decrease, but that is to be expected when an economy is struck by such a severe recession as this. Have we escaped the bubble?There are good reasons to believe that this is indeed the case. In the second half of the nineties, Dutch houses became more expensive very quickly, but this price increase can largely be explained by the increasing participation of women on the labour market and by the drop in interest rates. Since then, house prices have been developing rather modestly. So, in contrast to home owners in other countries, Dutch home owners did not go through spectacular 'golden ages' after 2000. On the other hand, up until now they did not have to face large price declines either.
This does not mean that house prices cannot drop further. First of all, there is a severe recession going on, putting further downward pressure on house prices. Second, if consumer confidence declines for whatever reason, prices may fall. Nevertheless, a collapse of Dutch house prices is unlikely.
Then again, even relatively small price declines create problems. They could, for example, force households into the red if their mortgage debt exceeds the selling price of the house they own. This seriously limits their ability to move and makes them prisoners of their own house, so to speak. Mobility on the labour market could be harmed as a result. Lower house prices could also harm the construction sector if the building of new houses becomes less attractive.
Although it is by no means a foregone conclusion that the government should rescue home owners, the above arguments provide some rationale for intervention. The Dutch government recently increased the threshold for the Nationale Hypotheek Garantie (NHG or national mortgage guarantee scheme) for dwellings to be applicable from EUR 265,000 to EUR 350,000. In case of problems due to for instance unemployment or divorce, the NHG guarantees the repayment of mortgage payments to the lender and, in some cases, will waive the residual debt of the borrower. By increasing the threshold, demand for houses in the newly added segment is stimulated.
The current recession again shows that house prices can go down as much as they can go up and that buying a house by taking on a high mortgage debt should by no means be seen as a risk-free investment.
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Contents
- Ch 1: The emergence of the crisis
- Ch 2: How a small problem became a big one
- Ch 3: Global trade in reverse gear
- Ch 4: Temporary crisis, permanent damage?
- Ch 5: The housing market during the crisis
- Ch 6: Try and try again on the labour market
- Ch 7: Throwing caution to the wind!
- Ch 8: Who bears the pension loss?
- Ch 9: Keeping banks in check
- Ch 10: Credit crisis and climate crisis: the one doesn't resolve the other
- Ch 11: How painful is the crisis?
- Ch 12: Learning from the crisis
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