Writing about homeownership in the Netherlands is like talking about politics with Republicans and Democrats gathered around the dinner table. Or some would even suggest trying to convert someone of a different religion to your own. It is incredibly personal and can easily be misconstrued as being offensive and causing personal injury despite one’s best intentions not to be.
Yet I have a sneaking suspicion that my family and I are not the only ones in our current predicament – to rent or to buy a house. And while occasional whispers among friends, neighbors, colleagues and acquaintances are being exchanged on how to tackle the dilemma, the housing crisis in the Netherlands is left unwritten and silent in the blogosphere. Before delving more into the conundrum of homeownership, it’s crucial to provide some context.
Contrary to popular belief, the most indebted European households do not reside in Portugal, Ireland, Italy, Greece and Spain. Rather, the infamous title belongs to households in the Netherlands – the Dutch who ironically are world renowned for prudence, frugality and thrift. In 2013, household debt in the Netherlands was more than 250% of disposable income, according to European Union statistics agency Eurostat. Much of this can be directly attributed to mortgage debt.
Years before the financial crisis of 2008, Dutch banks granted mortgages that often exceeded 125% of the value of a home – generously covering taxes, transactions costs, renovations, furnishings, and even new-car purchases. The Dutch government also encouraged homeownership by providing substantial mortgage tax breaks. All interest paid on a mortgage loan is deductible from taxable income, creating substantial tax relief and thus a strong incentive to buy rather than to rent. The amount of tax relief depends on factors such as the marginal tax rate with benefits increasing proportionately with income and the amount of the mortgage.
A paper written by analysts Windy Vandevyvere and Andreas Zenthöfer for the European Commission in reference to the housing market in the Netherlands concludes, “Taxation policy, and in particular the favourable tax treatment of home ownership through mortgage interest deductibility (MID) creates incentives for a misallocation of capital toward housing, artificially raises housing prices, disproportionately favours high-income taxpayers, has ambiguous effects on housing tenure and has encouraged high household indebtedness.”
Since 1 January 2013, reforms by the Dutch government have been implemented to address the current housing market crisis. Part of the measures include no longer allowing interest-only mortgage where the loan amount is greater than 50 percent of the value of the property.
From a superficial glance, homeownership would be a more pragmatic option. As the universally accepted adage goes, ” Renting is like throwing your money away.”
Casual conversations regarding the allure of the mortgage tax relief often neglect other costs (both in time and money) that should be taken into consideration, such as but not limited to:
- Insurance premium
- Home maintenance (roof leakage, faulty drains, water boiler, clogged toilets, etc)
- Yard work, pest control
- Remodeling
- Fluctuations of the housing market
Other tax-deductible fees such as valuation fee, mortgage broker fee, notary fee, percentage of the mortgage interest, administration costs, etc are still expenses out-of-pocket.
Like the American dream, homeownership in the Netherlands is considered by many to be a symbol of success, a right of passage into being responsible, honest, hardworking citizens. Owning a home, we were raised to believe, was the essence of the good life, at the very heart of our material aspirations. The belief that a house was the best investment one could make is so ingrained in our collective psyche that it’s almost a religion. But how much truth lies in that sentiment given today’s economic climate and the current reality of the Dutch housing market?
Now that it is no longer a given that home-prices will appreciate in value, homeownership is no longer a straight-forward prudent buy. In fact, it could spell out financial disaster.
University of Amsterdam analyst Johan Conijn asserts that approximately 700,000 Dutch households are at risk for negative equity, owing more to the debt of the house than the actual market value attached to it. According to Rabobank, one of the major banks responsible for mortgages, house prices are on average 20% lower than the peak of 2008. Rabobank urges caution amidst improved overall sentimentality, stating that “The rise will be modest, as borrowing capacity has declined in recent years and a relatively large number of households are still saddled with potential negative equity.” Thus, just like their American counterparts, many Dutch households face the reality of being underwater and may have to wait a while for prices to recover.
And another important fact to consider is how much choice do people in the Netherlands really have? The private rental market in the Netherlands is quite small, selection is limited and highly competitive. As more people are waking up to the reality that homeownership or upgrading may have to wait, rental prices are also increasing with growing demand. Furthermore, the private rental market is not regulated by the Dutch government, allowing real estate agents and homeowners freedom to fix the rent and are not restricted to a price maximum. Many people have sucumbed to homeownership simply because they genuinely feel that they have no choice but to buy – priced out of the private rental market and yet earning too much to qualify for subsidized housing rentals.
Based on my own personal experience as a home renter, I am a vocal proponent of “try-before-you-buy“. There’s only so much you can learn about a house until you actually live in it. Due to the current stalemate, many homes for sale are also available for rent for one year with the possibility to extend until sold. The year gives you and your family a trial period to become familiar with the house, all it’s quirks, and whether or not the neighborhood is the right “fit” for your family. It gives you more time to get a more accurate valuation of the house for sale beyond the initial superficial impressions of the house. Renting also affords you the freedom and flexibility of moving without major financial repercussions, of being tied-down to a house or apartment that may not be worth its current mortgage.
As a proclaimed homebody who loves to nest, I also have my heart set on the idea of a dream house. But our current reality as a single-income household, coupled with our commitment issues of not yet finding a place that truly speaks to both our hearts, also means that dream will just have to wait. Renting also enables us to live in a house with a reasonable rent that we would not be able to afford under a mortgage. And the reality is, which is true for many young families today, whatever house we could buy right now, is not the house that we envision staying in for the next three to five years. Until then, I have to confess that I’m having lots of fun re-discovering the Netherlands as we search for our next place to call home.
Disclaimer: There are a lot of variables that could make purchasing or renting more advantageous. The benefits of renting or homeownership are different for each individual’s personal circumstances. Please consult a financial professional before making any important decisions. The article written is more to illicit a discussion -an exploration of the Dutch housing market and an attempt to challenge the status quo rather than to provide a definitive answer.
