Over the past few months, I have posted a number of articles on the worsening economic situation facing the Netherlands economy (see here, here, and here).
The catalyst for the downturn in the Netherlands economy is the housing correction, which has seen house prices fall by -6% in the year to March 2013 to be down around -18% since prices peaked in 2008 (see next chart).
Due in part to the Netherlands’ generous mortgage tax relief, which allows home owners to deduct from tax all interest payments for a maximum period of 30 years, as well as a series of exotic “interest-only” mortgage products created to maximise tax deductions, Netherlands’ household debt is amongst the world’s highest, amounting to over 260% of disposable incomes in 2011 (see next chart).
Accordingly, the house price correction has pulled many highly-indebted Dutch households into negative equity. In the process, consumer confidence and spending have declined sharply (see next chart).
And the Netherlands economy is contracting, down -1.2% over the past year (see next chart).
Meanwhile, the release of labour force data a fortnight ago showed Dutch unemployment increasing to 8.1%, a level not seen since the 1980s, with job losses most accute in the building industry (see next chart).
An article published overnight in The Telegraph provides additional insight into the Netherlands’ economic crisis, painting a picture of a post-housing bubble economy hamstrung by the loss of currency controls and monetary policy, courtesy of its ties to the Euro:
The Netherlands offers a salutary lesson of what can happen to a rich sophisticated economy caught in a post-bubble crunch once it has lost control of its currency, central bank and monetary levers. This would have happened to Britain without the Bank of England, and the US without the Fed…
“The Netherlands bears striking resemblance to Spain and Ireland two or so years ago,” says Stephen Jen from SLJ Macro Partners. Holland has a fat current account surplus of 8.3pc of GDP and a savings rate of 26pc, but Mr Jen says such “virtues” did not prevent Japan succumbing to the after-shocks of its housing crash.
Holland’s errors were made long ago when tax policy and regulation combined to produced a housing bubble to match Britain’s follies under Gordon Brown.
As in Britain – or Japan when it buckled in 1990 – there is a long-term housing shortage. Rabobank says the overhang of unsold homes is 228,000. That is bad but not disastrous. The crisis stems from rampant credit, not rampant building.
Regulators let the average loan-to-value ratio of new mortgages soar to 120pc at the peak. Since mortgage interest is tax deductible, around 60pc of the entire stock of mortgages is interest-only.
Unlike the Bank of Spain, which tried to “lean against the wind”, Dutch officials saw no need for extra buffers to offset the (then) ultra-loose policies of the European Central Bank, geared to German needs when Germany was in slump. The ratio of household debt to disposable income peaked at 266pc in 2010, the highest in EMU and almost a world record.
The denoument is well under way. Dutch house prices have fallen 18pc, leaving a quarter of all mortgages “onder water”, and there is surely worse to come. Standard & Poor’s expects prices to drop 5.5pc this year, and slide again in 2014. This is infecting everything. “Consumer sentiment in the Netherlands is at much the same level now as at the depths of the global financial crisis,” said Ken Wattret, an analyst at BNP.
There has been little forced selling of property so far, which is lucky since Dutch banks are up to their necks in mortgage portfolios. They face a huge “funding gap”. The loan-deposit ratio (LTD) is 183pc, compared with roughly 70pc in the US and Japan, 100pc in Germany or 120pc in Britain.
This means that Dutch lenders – like Northern Rock before them – must rely on the capital markets to roll over debts. This is courting fate. “The persistently high LTD ratio makes Dutch banks particularly vulnerable to a scenario in which market confidence evaporates,” said the Nederlandsche Bank (DNB) in its latest stability report.
The sharp deterioration in the Dutch economy is now placing pressure on the central government to abandon austerity measures, which it has pursued for the best part of two years and is partly responsible for the contraction in demand.
As argued previously, the Dutch are paying the price for years of poor housing policy, including:
- 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.
And their folly is being compounded by the Netherlands’ ties to the euro, which has placed control of key macroeconomic tools (namely the currency and interest rates) in the hands of the ECB, as well as austere fiscal policies pursued by the Dutch central government.
