econscius

Bubbles Going Dutch: Mortgages at 125% Loan To Value

In Housing Bubble, Mortgage Interest Deduction, Netherlands on December 5, 2011 at 10:19 pm

Following up on my post about the difficulty of spotting and deflating speculative bubbles [1], there is an interesting article in today’s Wall Street Journal “Mortgage Burden Looms Over Dutch” referring to a possible housing bubble in the Netherlands, home of the most infamous bubble of all: the tulip bulb mania of 1636-7.

We read:

“In the boom years, Dutch banks routinely wrote mortgages that exceeded 125% of the value of the home- covering closing costs, taxes, renovations and even new car purchases on the side.”

Household debt in the Netherlands was more than 240% of disposable income, according to EU statistics agency Eurostat – one of the highest levels of any advanced economy and easily the highest in the Euro zone.” [2] [emphasis added]

Is the Dutch economy in a speculative real estate bubble?  Might it burst and bring down one of Europe’s better performing economies?  The article says some Dutch regulators “see it as a major risk for the economy.”

What caused the Dutch housing bubble?  Lehman?  The article says:

“Economists lay part of the blame for the Netherlands’ high household debt levels on the tax deduction for mortgage interest.”

Sound familiar?

The [mortgage deduction] policy, similar to the U.S., inflates real-estate values, many economists say, and encourages households to take on more debt than they can handle.” 

Here we have regulators identifying a risk.  Surely the examples of Spain, the USA and other nations should serve as a bonus red flag to the Dutch. 

Are the Dutch government and the Dutch people on the case?

“On Tuesday, Dutch Prime Minister Mark Rutte dismissed worries about the Netherlands’ mortgage debt.  ‘It’s not a big issue…if you look at the whole picture’, he said, noting the Dutch “have huge private savings.”

To my ears, the Prime Minister is spouting typical bubble rationalizations.   We always seem to hear ‘look at the entire picture of a fundamentally sound economy.’  His point about private savings is suspect for the obvious reason a debt crisis is usually accompanied by a plunging stock market.  Dutch savings, like American savings in 1929, 2000 or 2008, can shrink very quickly in a stock market collapse, which may move in tandem with other asset declines, such as housing. 

If not the head of the Dutch government, what about the Dutch people who surely have seen what happened in other countries?  “Only 18% of the Dutch public support eliminating the mortgage interest deduction entirely.”  [3] I do not speak Dutch, so I rely on the Wikipedia summary of the literature, which shows a lack of political will to take on the mortgage deduction.

There are obvious parallels with the United States.  Well-intentioned government policies such as the mortgage interest deduction and low interest rates plus increasingly aggressive private bank lending fuel a speculative real estate bubble and excessive debt levels.  As with the United States, a handful of economists and regulators identify a potential problem.  But the public at large, and the politicians who represent them, deny there is a bubble and are unwilling to make the politically tough decisions to head off a potential disaster.  We know how this story usually ends.  The Netherlands is now one of the better EU economies (5% unemployment) and the Dutch can find reasons to believe their current prosperity is real and their home values justified, despite the meltdowns so many other countries have recently experienced.

I cannot predict the future but I think the dyke is about the break and a flood of Dutch housing problems will pour through when their housing bubble bursts.  It is another example of the difficulty of spotting bubbles and actually deflating them.

Aftermath of the flood in Oude-Tonge, Goeree-Overflakkee, Netherlands

[1] http://econscius.wordpress.com/2011/11/29/irrational-exuberance-about-spotting-bubbles/

[2] http://online.wsj.com/article/SB10001424052970203752604576640662346325544.html?KEYWORDS=mortgage+dutch

[3] http://en.wikipedia.org/wiki/Home_mortgage_interest_deduction#Netherlands, retrieved 12/5/2011.

Pictures (tulips, Amsterdam and Dutch inundation from North Sea flood of 1953) from Wikipedia Commons.

  1. [...] Bubbles Going Dutch: Mortgages at 125% Loan To Value [...]

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