Towards a way out of the distorted Dutch housing market

Group-4 (Morning). Arshad Bastiaan Seow Siak Mong Yan Shufen Bilash Monjur Osfinita

Sequence of Presentation
Part 1. Causes of problem: Supply side, Demand Side, Government Intervention Part 2. Consequences: Equity and Efficiency issues Part 3. Possible Solutions Part 4. Recommended Solution

Part one The problem

Part 1a. Supply factors
1. Housing market is a stock market (depends on stock available) 2. Production lag 3. Spatial dis-equilibrium quantitative shortage of homes 4. Government Supply policy contributes to inelastic supply (0.3 in Netherland vs 2.05 in Germany) (Kakes and Tieman, 2002)

Inelastic supply

Reasons for low elasticity*
‡ Spatial planning policy of government ‡ Stringent quality and environmental standards push up prices ‡ Land sales major source of income for municipalities ‡ Extensive objection and appeal procedures ‡ Neo-classical price theory argument: relationship construction costs vs current house prices (Abraham & Hendershott, 1996). ‡ Result: Price-quality of new houses comparative lower

Part 1b. Demand factors
Demographic factor:
18 16 14 Millions population 12 10 8 6 4 2 0 1900 1925 1950 1975 2000 2008 2009 2010 5.1 7.3 4.6 10 6.8 7.2 7.3 7.4 13.6 15.9 16.4 16.5 16.6

Total population

Total private households

Number of households will increase

Source: Cijfers over Wonen, Wijken en Integratie 2009

Additional factors causing Rising House Prices
‡ Income Factor: Rising household incomes and falling interest rates led to rising house prices (Haffner & De Vries, 2009) ‡ Financial Innovation Factor: Banks loosen lending criteria inclusion of secondary and temporary incomes in determining borrowing capacity. Liberalization and growing competition in the mortgage market continue to depress interest rates. Differentiation of products

Part 1c. Government intervention creates market distortions
‡ Housing can be taxed in two ways: 1. As durable consumable good 2. As an asset or investment good (choose of Netherlands in 1914) Rationale: Mortgage interest is cost to realize income and not capital ‡ Fiscal regime: Full amount of interest paid is income-tax deductible against the marginal tax

Part 1c. Government intervention creates market distortions
‡ Acquisition costs are tax-deductible but proceeds are taxed ‡ Mortgage interest deduction=Reduction in living cost consume more housing ‡ Housing transfer tax 6% reduces mobility and distorts Labor Market

Box 1 Which income is being taxed Income from labor and house+imputed income (housing tax)tax)-Mortgage interest rate deduction Progressive tax

Box 2

Box 3

Income Income from Savings and from considera investments ble interests

One tax rate

One tax rate

Example for medium and high income
Without deduction (30.000 income, mortgage 200.000 on house of 250.000) 33.5% over first 17.878 42% over next 40.000 Housing tax (0.55%) To be paid income tax Difference 5989 5091 (30.000- 17.878)*.42 NA 11080 With deduction (30.000 income, mortgage 200.000 on house of 250.000) 5989 2122 (20.000 -17.878)*.42 1100 (0.55*250.000) 6880+1100=7980 3100

Without deduction (100.000 income, mortgage 400.000) 33.5% tax over first 17.878 42% tax over next 40.000 50% tax over remainder Housing tax (0.55%) 5989 16800
(40000*.42 )

With deduction (100.000 income, mortgage 400.000 for 5%) 5989 16800
(40000*.42 )

21061
(42122*.50)

11062
(42122-20000 mortgage*.50)

NA

2750
(0.55%*500.000 worth house)

To be paid income tax Difference

43850

33851+2750=36601 7249

Part 2. Consequences: Equity and Efficiency issues

Micro-economic view

Source: M. Peter van der Hoek, Taxing owner-occupied housing: comparing the Netherlands to European Union countries PublicFinanceandManagementVolumeSeven,Number4, 2007, pp.404

Fiscal result
Deduction mortgage interest Box 3 Exemption surplus value Deduction for capital insurance 11.4 billion euro 7.7 billion euro 0.7 billion euro

Revenue: Imputed rent for home -2.2 owner Transfer tax Total net subsidy -2.4 15,2 billion euro

Source: Ambtelijke commissie brede heroverwegingen (2010): Wonen. Rapport brede heroverwegingen .

Risk of Current Fiscal Treatment
1. Vulnerability: Increased vulnerability to external shocks and contagion risks (recession, increase in interest rate, housing market collapse) 2. Fiscal cost: High fiscal costs 15.2 billion euros 3. Prices up: Inelasticity of supply, government subsidies and mortgage interest relief are not stimulating supply but merely pushing up prices (Besseling et al. 2008) 4. High household indebtness: Loan to value ratio over 100%)

Housing Mortgage Trend

Results
5. Inequity Overpriced generation and income inequity Contributes to fiscal deficit: ability to pay principle Low income groups cannot afford mortgage High income benefit more

Mortgage tax relief by income group, 2008

http://www.cbs.nl/en-GB/menu/themas/bouwenwonen/publicaties/artikelen/archief/2010/2010-3118-wm.htm

Share of total mortgage tax relief by income group, 2008

http://www.cbs.nl/en-GB/menu/themas/bouwenwonen/publicaties/artikelen/archief/2010/2010-3118-wm.htm

The richer the more one benefits
6000 5000

A nnual subsidy

4000

3000

Owner Renter

2000

1000

0 1 2 3 4 5 6 7 8 9 10

Income decile
Source: Frans Schilder, Welfare implications of subsidization in the Dutch housing market,2Amsterdam School of Real Estate http://www.eres2010.org/contents/presentations/eres2010_342_pres_Schilder_WELFARE_IMPLICATIONS.ppt

Results
6. Competitive-disruptive effects on labor market Reduced mobility (expensive to sell house, cost involved selling house is disincentive) Higher income taxes 7. Unfair advantage of Dutch Banks Subsidized financial sector (higher than necessary mortgages=more profit) 8. High Mortgage crowds out saving and equity investments

Part 3. Solutions

Three scenarios
Scenario 1 1. Move house from box 1 (income) to box 3 (capital) 2. Don t charge house in box uptill the point of average housing price 3. Abolish house tax in box 1 and don t tax capital insurance house Scenario 2 1. Keep in box 1, but only allow deduction if people repay loan (so every year less debt less deduction) 2. Abolish capital insurance deduction 3. Reduce the housing tax Scenario 3 1. Mortgage interest rate deduction capped at 30% (instead of income tax) 2. Abolish housing tax and capital insurance deduction

fiscal neutral (house becomes (house becomes capital item, but no capital item) taxes over first 300.000 euro and can deduct mortgage from capital) Structural income 7.4 billion euro effect of which Government 5 billion euro of which Households Structural Increase in ability to consume Price change houses first year Price change houses structural (after 20 years) 3.7 billion euro 1.2 billion euro

(house becomes capital item, but no taxes over 56% of value of house and can deduct mortgage from capital) 5.6 billion euro 4 billion euro 1.6 billion euro 1% -11.7% -13.8%

2.4 billion euro 2.5 billion euro 1.5% 1.4% -15.1% -17.6% -8.7% -10.2%

Source: Centraal Planbureau , Hervorming van het Nederlandse woonbeleid , No 84 , April 2010

Part 4. Recommendation

Solution limitations
1. 2. 3. 4. Government has to respect existing contracts Spatiality Horizontal Equity Homeownership gives people a stake in society and induces them to care about their neighborhoods and towns. Owners face strong incentives to maintain their property

Reasons for continued government intervention
‡ Spatial planning is necessary ‡ Very high population density ‡ Balance environment and housing ‡ Spatially out of equilibrium

Randstad

Criteria used to select proposed recommendation
‡ It has been done before: Sweden and UK: ‡ Equity: Adhere to ability to pay principle and benefit received ‡ Efficiency: a) Reduce excess burden as much as possible b) Reduce crowding out ‡ Fiscal Sustainability ‡ Simple and transparent tax system ‡ Reduce vulnerability of house owners ‡ Prevent economic crisis and gradualism

Source: M. Peter van der Hoek, Taxing owner-occupied housing: comparing the Netherlands to European Union countries PublicFinanceandManagementVolumeSeven,Number4, 2007, pp.404

Group 4 s choice

Constraints and risks
‡ People can no longer afford the mortgage interest payment ‡ Fall in housing prices cannot repay mortgage ‡ Supply issue not tackled ‡ Unemployment in construction sector

Risks
‡ Government support must not be generic, but be specific and directed at people without purchasing power ‡ Government support must not be generic, but be specific and directed at people without purchasing power

Successful or Not?
‡ Create another form of subsidy such as housing allowance, which could benefits households ‡ To make houses financially affordable for households with adequate space ‡ Applicable to house owners and renters ‡ To target family with children ‡ It will be gap-coverage (by introducing other supportive allowances such as: children grants, family grants ‡ To introduce special housing supplements to pensioners and disabled people

Housing Allowance
‡ Expenditure: housing allowance to family and young people; disabled people; pensioner (ageing citizens) ‡ Recipients: households received housing allowance to family; households with children; housing supplement to disabled; housing supplement to pensioners ‡ Distribution of recipients: Couples with children receiving housing allowance; single parents i.e. single mothers ‡ Impacts on rental recipients affordability: the rent before housing allowance with nearly half percentage of before tax income and the rent after housing allowance

Dispute of Housing Allowance
‡ Welfare deception ‡ Redistribution issue ‡ It will affect the weak persuasion / encourage of housing consumption ‡ Conflict might occur with other social policy ‡ Moral hazard

‡ ‡ ‡

Sources (1995) The tax reform and the housing market, used Englund, P., Hendershott, P. H. & Turner, B.
Swedish Economic Policy Review,2, pp. 319 356. Swank, J., Kakes, J., & Tieman, A. F. (2002) The Housing Ladder, Taxation and Borrowing Constraints (Amsterdam, the Netherlands: De Nederlandsche Bank). Boelhouwer, Peter and Hoekstra, Joris(2009) 'Towards a Better Balance on the Dutch Housing Market? Analysis and Policy Propositions', International Journal of Housing Policy, 9: 4, 457 475 Central Buro of Statistics: http://statline.cbs.nl/ Boelhouwer, Peter , Haffner, Marietta , Neuteboom, Peter and Vries, PaulDe(2004) 'House prices and income tax in the Netherlands: an international perspective', Housing Studies, 19: 3, 415 432 Haffner, Marietta E. A. and Boumeester, Harry J. F. M.(2010) 'The Affordability of Housing in the Netherlands: An Increasing Income Gap Between Renting and Owning?', Housing Studies, 25: 6, 799 820 Jan Rouwendal, Mortgage Interest Deductability and Homeownership in the Netherlands, Discussion Paper 2007 - 050, July 9, 2007. Department of Spatial Economics, VU University and Netspar

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Sources used Glaeser, E. L. & Shapiro, J. M. (2002) The bene ts for the home mortgage interest deduction (National Bureau of Economic Research) Working Paper 9284, October. Ambtelijke commissie brede heroverwegingen (2010): Wonen. Rapport brede heroverwegingen . Centraal Planbureau , Hervorming van het Nederlandse woonbeleid , No 84 , April 2010 Frans Schilder, Welfare implications of subsidization in the Dutch housing market,2Amsterdam School of Real Estate http://www.eres2010.org/contents/presentations/eres2010_342_pres_Schilder_WELFARE_I MPLICATIONS.ppt Global Property Guide: http://www.globalpropertyguide.com/Europe/Netherlands/PriceHistory Arjen van Dijkhuizen, Financial Stability Division, The Nederlandsche Bank, Amsterdam, the Netherlands. http://www.biz.org/publ/wgpapers/cgfs26dijkhuizen.pdf Martin Koning, Naar een vloeiende woningmarkt http://www.encore.nl/publications/Naar%20een%20vloeiende%20woningmarkt.ppt http://www.cbs.nl/en-GB/menu/themas/bouwenwonen/publicaties/artikelen/archief/2010/2010-3118-wm.htm Marietta Haffner and Paul de Vries, Dutch house price fundamentals, Paper presented at Australian Tax Research Foundation Housing and Taxation Symposium, Melbourne, 11 February 2009 OECD (2004) Economic Surveys, Netherlands, Paris.

Minimale interventie (1)
‡ beleid gericht op externe effecten ‡ liberalisering grondbeleid met harde aanpak machtposities ‡ inkomenssteun kwetsbare groepen ‡ eigendomsneutrale behandeling:
± afschaffen prijsregulering en renteaftrek

Minimale interventie (2)
‡ Voordelen:
± veel voordelen door wegnemen verstoringen
‡ binnen de woningmarkt en bij consumptie ‡ betere allocatie van woningen ‡ snellere aanbodreacte

‡ Nadelen:
± inkomens en vermogenseffecten ± juridische haalbaarheid

Gerichte interventie (1)
‡ ‡ ‡ ‡ ‡ ‡ rol sociale huursector blijft behouden inkomenstoetsing prikkels voor aanbodsreacties verruiming ruimtelijke beleid versobering hypotheekrente algemeen fiscaal voordeel voor huurders

Gerichte interventie (2)
‡ voordelen:
± geen belemmeringen keuze huren of wonen ± minder wachtlijsten sociale huurwoningen ± meer doorstroming

‡ nadelen:
± subsidiering blijft omvangrijk ± voldoende prikkels woningcorporaties ?

Solution limitations
1. Government has to respect existing contracts 2. Gradual phase out through: a) nominal limit of tax-deductability b) 3. Check Boelhouwer, Peter , Haffner, Marietta , Neuteboom, Peter and Vries, PaulDe(2004) 'House prices and income tax in the Netherlands: an international perspective', Housing Studies, 19: 3, 415 432 4. Arguments for continued government intervention/involvement

Reasons for continued government intervention
‡ Horizontal Equity ‡ Homeownership gives people a stake in society and induces them to care about their neighborhoods and towns ‡ Owners face strong incentives to maintain their property

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