Counting the Chickens Before They’re Hatched
Pfäffikon SZ, Switzerland – You may have noticed the Dutch housing market is slowly recovering. Well-rested, local real estate speculators are now trying to pick up a windfall and are jacking up the prices as a result. This means the associated turnover is increasing as well. This makes the statistics even more pleasing to the eye. I call it one-sided High Frequency Trading in real estate. The NVM is shouting from the rooftops in order to share the good news with potential buyers. Without prejudice to the NVM, I do note that these real estate experts provided the world with a large list of incorrect assumptions at the outbreak of the crisis. The NVM is wearing rose-tinted spectacles.
1,200 Billion Debt
The Netherlands is wrestling a debt of around 1,200 billion euros (2,644 billion guilders). A lot of money for a population of 16.8 million; not much is left of the thrifty Dutchman. The Netherlands is a debt machine of global proportions. The Dutch Central Bank acknowledges that the underwater mortgage market is a persistent phenomenon. The previously described millstone around the neck is a fact for roughly a quarter of Dutch homeowners. This situation is likely to continue for at least ten more years, razing any sound financial perspective to the ground. Everyone also knows that increasing interest rates while debt remains this high is a ticking time bomb.
Five times Salary
To my amazement, it was eluded to me last week that ABN AMRO still offers finance worth five times your salary when purchasing a private home, and this without a personal contribution. It appears that this bank has learned little in recent years with Mr. Zalm at the helm. The IPO beckons and there needs to be plenty to cheer about; the bank’s financial statement must shine at all costs.
I am not against private property ownership. In fact, I am an avid supporter. However, the conditions and principles must be sound. Over the years there has been a lot of fiscal work done to support home ownership in the Netherlands. But as a result, your own home is now too often at the mercy of fickle politics. These are not stable investment environments for people to make the biggest financial decision of their lives.
Shaking Up the System
The crux of the matter is that the entire system around financing and taxation of private homes needs a good shake-up. There are plenty of smart economists and tax experts in the Netherlands who can give the government a hand. Years ago, I highlighted the important role that Dutch pension funds can play in combating the crisis. Fortunately I see plenty of good initiatives coming through.
Personally, I would opt for a system in which the homebuyer is required to maintain a so-called ‘margin of safety’ as a percentage of the purchased home. A pension fund, or some ingenious form of a one-time subsidy structure, which would temporarily facilitate this ‘margin of safety’ if the buyer falls short. In such a case, the mortgage interest deduction would be cancelled immediately. After all, in the event of an interest rate hike the Dutch State will never be able to pay this bill.
Exposure
Many homebuyers have taken the leap because the monthly payments are sometimes lower than paying rent. But the exposure, maintenance and significantly increased local taxes are then too often (deliberately) forgotten because ‘bricks and mortar always increase in value’. But you now know bricks and mortar can sharply decline in value. No one can tell you whether the bottom of the market is there, not even the NVM broker.
With the bond market reaching its last legs after a thirty-year bull market, a sudden sharp rise in interest rates would lead to quite the hangover for the sensitive Dutch housing market. Furthermore, even though the crisis appears to be on the wane, it is not yet over. So don’t count your chickens just yet. The Dutch Central Bank has not yet accounted for such a scenario and some very extensive stress tests are in the pipeline.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
