Dutch Housing Bubble Delusion - Europe's Core Rots Some More
Housing-Market / European Housing Apr 12, 2013 - 04:06 PM GMTBy: Raul_I_Meijer
A report published Thursday by the real estate industry in the Netherlands states that the average home price is now 18% lower than it was at the peak in 2008, while detached homes lost 20%-25% (March 2013 YoY prices fell 6.8%, says Eurostat). A separate, earlier, report estimated that 20% of homes, or over 1 million, are now underwater.
Today's report comes hot on the heels of a study issued Wednesday by a government commission, which took a full year to prepare and 121 pages to explain what went wrong in the Dutch housing bubble, and what should be done now to correct it.
The core problem is simple: from 1995 to 2008 home prices more than tripled (rose 200%+). Hence, if we round off to a 20% drop from peak levels, or 60% from 1995 levels when prices were a third of what they were in 2008, there's still an increase of about 150% from the starting levels that needs to be dealt with. We can discount for, and let's be generous, perhaps 50% for overall price inflation, but that still leaves us with a 100% increase, which is quite a bit more than the 60% absorbed so far.
This means that, seen from the 2008 peak perspective, a 20% price fall has been completed, and another 33% drop is needed to get back to where it came from. Some may cite reasons why prices should remain elevated, but that smacks too much of the "this time is different" argument; one might as well argue the opposite. A main point raised is that demand outstrips supply, but demand is not what people want; it's what they will be able to afford. And the Dutch economy is shrinking.
Well, you see the problem by now, of course: like many other nations, the Dutch today feel quite strongly that they have suffered enough already, and someone somehow needs to revive the housing market. But like everyone else, the Dutch wish to wish away the problem of the not yet corrected part of the pricing model. In their case, they want 200% (1995+100%) to be the new normal (a.k.a. the new black).
Not surprisingly, the government report says that A) all parties are to blame, and B) the government needs to get more involved, i.e. make sure loans become available for people who now can't get them, a.k.a. people who are not the most likely prime candidates to buy a home that's still some 33% overvalued. Though, admittedly, sucking in those last remaining suckers would prop up moribund builders, agents and lenders for a while longer. Whether that's a government's task is at the very least highly questionable (obviously, other countries, including the US, work on similar resuscitation efforts).
The most hilarious I've seen to date coming out of the Netherlands (a good second was:" build more homes"!) is the proposal for the government to artificially raise home rents so people will be more likely and tempted to buy a home. An act which, incidentally, has recently been stripped of its most flagrant artificial incentives.
Incentives like the 105%-110% mortgages offered by lenders to everyone who could fog a mirror, but more than that, the main one, a very generous mortgage interest deductibility system, which at some point had people believe they would be stealing from themselves if they didn't buy a home. The more you borrowed, the better off you were. The Dutch government stood by and did nothing (except count the extra tax revenue). And now a government committee says everyone's to blame, not just them. Incompetent inglourious lying basterds.
Throughout the western world it's been an active collaboration of the governments and the banks and the real estate industry and the builders. For private parties, it's just a nice one-off windfall (if you're the boss). But if tax rates remain the same, tripling home prices are such a windfall for any level of government that it's really worth it to encourage the madness where and whenever you can. It doesn't get more predictable than that. And neither does the follow-up: with prices, but especially sales, dropping off a cliff, tax revenue falls, and since there's nothing as addicted to anything as a government to taxes, services and benefits go out with the bathwater. But only after all lenders have been made whole (Dutch banks have mostly been nationalized) with the - largely future - tax revenues of the home buyers and their unborn progeny.
It's a very simple story really: this is a widespread tale of western societies transforming themselves into pyramid schemes; or perhaps we should say one big global Ponzi scheme. And these Ponzi things collapse, and there's nothing anyone can do to "fix" that: the poisoned chalice must and will be emptied to the last drop. Only, the politicians - legally - have their hands in everyone's pocket, so they can throw around trillions of dollars and euros to hide the process of the plunging system for as long as it lasts. That's where we're at right now.
And it's not that all of these folks have evil minds; the intelligence level of politicians in the Netherlands approaches zero as much as it does in other western countries. The issue is that the entire system has blinders on, the blinders of ever-lasting growth economic "education", and of when you have none, do what you can, sell your grandma if you must, to return to growth ASAP. A few who understand it could be labeled evil; the rest are all blinded by the lights of power. And at best completely useless when it comes to governing a society that is not growing rapidly and happily.
They can think in only one dimension, and that one-dimensional thinking can in the end lead to one end only: complete and utter disaster. It's everything on red every time and every day, and that's not how the world works. Every time black comes up is, for these people, nothing but another reason to put it all on red again next time. A surefire recipe for mayhem. But it's all they have ever learned.
Still, don't take my word for it. Christoph Schult and Anne Seith laid it out quite well in Der Spiegel last week:
Underwater: The Netherlands Falls Prey to Economic Crisis
"Underwater" is a good description of the crisis in a country where large parts of the territory are below sea level. Ironically, the Netherlands, widely viewed as a model economy, is facing the kind of real estate crisis that has only affected the United States and Spain until now. Banks in the Netherlands have also pumped billions upon billions in loans into the private and commercial real estate market since the 1990s, without ensuring that borrowers had sufficient collateral.
Private homebuyers, for example, could easily find banks to finance more than 100% of a property's price. "You could readily obtain a loan for five times your annual salary," says Scheepens, "and all that without a cent of equity." This was only possible because property owners were able to fully deduct mortgage interest from their taxes.
Instead of paying off the loans, borrowers normally put some of the money into an investment fund, month after month, hoping for a profit. The money was to be used eventually to pay off the loan, at least in part. But it quickly became customary to expect the value of a given property to increase substantially. Many Dutch savers expected that the resale of their homes would generate enough money to pay off the loans, along with a healthy profit.
More than a decade ago, the Dutch central bank recognized the dangers of this euphoria, but its warnings went unheeded. Only last year did the new government, under conservative-liberal Prime Minister Mark Rutte, amend the generous tax loopholes, which gradually began to expire in January. But now it's almost too late. No nation in the euro zone is as deeply in debt as the Netherlands, where banks have a total of about €650 billion in mortgage loans on their books.
Consumer debt amounts to about 250% of available income. By comparison, in 2011 even the Spaniards only reached a debt ratio of 125%.
The Netherlands is still one of the most competitive countries in the European Union, but now that the real estate bubble has burst, it threatens to take down the entire economy with it. Unemployment is on the rise, consumption is down and growth has come to a standstill. Despite tough austerity measures, this year the government in The Hague will violate the EU deficit criterion, which forbid new borrowing of more than 3% of gross domestic product (GDP).
It's a heavy burden, especially for Dutch Finance Minister Jeroen Dijsselbloem, who is also the new head of the Euro Group, and now finds himself in the unexpected role of being both a watchdog for the monetary union and a crisis candidate.
Even €46 billion in austerity measures are apparently not enough to remain within the EU debt limit. Although Dijsselbloem has announced another €4.3 billion in cuts in public service and healthcare, they will only take effect in 2014.
"Sticking the knife in even more deeply" would be "very, very unreasonable," Social Democrat Dijsselbloem told German daily Frankfurter Allgemeine Zeitung, in an attempt to justify the delay. It's the kind of rhetoric normally heard from Europe's stricken southern countries. The adverse effects of living beyond one's means have become apparent since the financial crisis began. Many of the tightly calculated financing models are no longer working out, and citizens can hardly pay their debts anymore. The prices of commercial and private real estate, which were absurdly high for a time, are sinking dramatically. The once-booming economy is stalling.
"A vicious cycle develops in such situations," says Jörg Rocholl, president of the European School of Management and Technology in Berlin and a member of the council of academic advisors to the German Finance Ministry. "Customers have too much debt and cannot service their loans. This causes problems for the banks, which are no longer supplying enough money to the economy. This leads to an economic downturn and high unemployment, which makes loan repayment even more difficult."
The official unemployment rate has already climbed to 7.7%. In reality, it is probably much higher, but that has been masked until now by a demographic group called the ZZP. The "Zelfstandigen zonder personeel" ("Self-employed without employees") are remotely related to the German model of the "Ich-AG" ("Me, Inc."). About 800,000 ZZPers currently work in the Netherlands. [..] (ED: at a working population of maybe 10 million.)
The Dutch have long been among Europe's most diligent savers, and in the crisis many are holding onto their money even more tightly, which is also toxic to the economy. "One of the main problems is declining consumption," says Johannes Hers of the Netherlands Bureau for Economic Policy Analysis (CPB) in The Hague, the council of experts at the Economics Ministry. His office expects a 0.5% decline in growth for 2013. Some 755 companies declared bankruptcy in February, the highest number since records began in 1981. The banking sector is also laying off thousands of employees at the moment.
Because of the many mortgage loans on the books, the financial industry is extremely inflated, so much so that the total assets of all banks are four-and-a-half times the size of economic output.
The main problem seems to be that the entire westworld economic system is based on belief alone. The Netherlands has become a society built entirely on delusion, and it's by no means the only one.
Recently, 80-year old Dutch somewhat-euro-sceptic right wing statesman Frits Bolkestein said that within 5 years, Germany, Holland et al should and would introduce a second currency besides the Euro. He was adamant France could not be part of it: "they're broke!". It seems to me, so is Holland. It must be an increasingly lonely time to be Angela Merkel.
By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)
© 2013 Copyright Raul I Meijer - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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