towards a way out of the distorted dutch housing market

8/3/2019 Towards a Way Out of the Distorted Dutch Housing Market

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Towards a way out of the distorted

Dutch housing market

Group-4 (Morning).

Arshad BilashBastiaan MonjurSeow Siak Mong OsfinitaYan Shufen


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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


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Part one

The problem


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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)


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Inelastic supply


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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 constructioncosts vs current house prices (Abraham & Hendershott, 1996).

Result: Price-quality of new houses comparative lower


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Part 1b. Demand factors

Demographic factor:

5.1

7.3

10

13.6

15.916.4 16.5 16.6

4.6

6.8 7.27.3 7.4

0

24

6

8

10

12

14

16

18

1900 1925 1950 1975 2000 2008 2009 2010

Millionspopulation

Total population Total private households


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Number of households will increase

Source: Cijfers over Wonen, Wijken en Integratie 2009


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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


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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 ofNetherlands 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


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Part 1c. Government intervention

creates market distortions

Acquisition costs are tax-deductible but proceeds are

taxed

Mortgage interest deduction=Reduction in living

costconsume more housing

Housing transfer tax 6%reduces mobility and distorts

Labor Market


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Box 1Box 1 Box 2Box 2 Box 3Box 3

WhichWhichincome isincome isbeingbeingtaxedtaxed

Income fromIncome fromlabor andlabor andhouse+imputedhouse+imputedincome (housingincome (housingtax)tax)--MortgageMortgageinterest rateinterest ratedeductiondeduction

IncomeIncomefromfromconsideraconsiderablebleinterestsinterests

Income fromIncome fromSavings andSavings andinvestmentsinvestments

Progressive taxProgressive tax One taxOne taxraterate

One tax rateOne tax rate


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Example for medium and high incomeW

ithout deduction(30.000 income,

mortgage 200.000 on

house of 250.000)

With deduction

(30.000 income,

mortgage 200.000 on

house of 250.000)

33.5% over first

17.878

5989 5989

42% over next 40.000 5091

(30.000- 17.878)*.42

2122

(20.000 -17.878)*.42

Housing tax (0.55%) NA 1100

(0.55*250.000)

To be paid income

tax

11080 6880+1100=7980


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Without deduction

(100.000 income,

mortgage 400.000)

With deduction

(100.000 income,

mortgage 400.000 for

5%)33.5% tax over first

17.878

5989 5989

42% tax over next

40.000

16800 16800

(40000*.42 ) (40000*.42 )

50% tax over

remainder

21061(42122*.50)

11062(42122-20000 mortgage*.50)

Housing tax (0.55%) NA 2750

(0.55%*500.000 worth house)

To be paid income

tax

43850 33851+2750=36601

Difference 7249


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Part 2. Consequences: Equity and

Efficiency issues


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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


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Fiscal result

Deduction mortgage interest 11.4 billion euro

Box 3 Exemption surplus value 7.7 billion euro

Deduction for capital insurance 0.7 billion euro

Revenue: Imputed rent for home

owner

-2.2

Transfer tax -2.4

Total net subsidy 15,2 billion euro

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

heroverwegingen.


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Risk of Current Fiscal Treatment

1. Vulnerability:Increased vulnerability to external shocks andcontagion 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 andmortgage 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%)


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Housing Mortgage Trend


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Results

5. InequityOverpriced generation and income

inequity

Contributes to fiscal deficit: ability to pay

principle

Low income groups cannot affordmortgage

High income benefit more


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Mortgage tax relief by income group, 2008

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


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Share of total mortgage tax relief by income group, 2008

http://www.cbs.nl/en-GB/menu/themas/bouwen-


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The richer the more one benefits

0

1000

2000

3000

4000

5000

6000

1 2 3 4 5 6 7 8 9 10

Income decile

Annualsubsidy

Owner

Renter

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


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Results6. Competitive-disruptive effects on labor market

Reduced mobility (expensive to sell house, costinvolved 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


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Part 3. Solutions


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Three scenariosScenario 1

1. Move house from box 1 (income) to box 3 (capital)

2. Dont charge house in box uptill the point of average housingprice

3. Abolish house tax in box 1 and dont tax capital insurance house

Scenario 2

1. Keep in box 1, but only allow deduction if people repay loan (soevery 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 ofincome tax)

2. Abolish housing tax and capital insurance deduction


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fiscal neutral

(house becomes

capital item)

(house becomes

capital item, but no

taxes over first

300.000 euro and can

deduct mortgage

from capital)

(house becomes

capital item, but no

taxes over 56% of

value of house and

can deduct mortgage

from capital)

Structural income

effect

7.4 billion euro 3.7 billion euro 5.6 billion euro

of which Government 5 billion euro 1.2 billion euro 4 billion euroof which Households 2.4 billion euro 2.5 billion euro 1.6 billion euro

Structural Increase in

ability to consume

1.5% 1.4% 1%

Price change houses

first year

-15.1% -8.7% -11.7%

Price change houses

structural

(after 20 years)

-17.6% -10.2% -13.8%

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


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Part 4. Recommendation


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Solution limitations

1. Government has to respect existing contracts

2. Spatiality

3. Horizontal Equity4. 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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Reasons for continued government

intervention

Spatialplanning is

necessary

Very high

population

density

Balance

environment

and housing

Spatially out

of equilibrium

Randstad


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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 possibleb) Reduce crowding out

Fiscal Sustainability

Simple and transparent tax system

Reduce vulnerability of house owners

Prevent economic crisis and gradualism


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Source: M. Peter van der Hoek, Taxing owner-occupied housing: comparing the Netherlands to

European Union countries PublicFinanceandManagementVolumeSeven,Number4, 2007, pp.404


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Group 4s choice


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Constraints and risks

People can no longer afford the mortgage

interest payment

Fall in housing pricescannot repay mortgage

Supply issue not tackled

Unemployment in construction sector


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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


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Successful or Not?

Create another form of subsidy such as housingallowance, which could benefits households

To make houses financially affordable for householdswith adequate space

Applicable to house owners and renters To target family with children

It will be gap-coverage (by introducing othersupportive allowances such as: children grants, family

grants To introduce special housing supplements to

pensioners and disabled people


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Housing Allowance

Expenditure: housing allowance to family and youngpeople; disabled people; pensioner (ageing citizens)

Recipients: households received housing allowance tofamily; households with children; housing supplement

to disabled; housing supplement to pensioners Distribution of recipients: Couples with children

receiving housing allowance; single parents i.e. singlemothers

Impacts on rental recipients affordability: the rentbefore housing allowance with nearly half percentageof before tax income and the rent after housingallowance


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Dispute of Housing Allowance

Welfare deception

Redistribution issue

It will affect the weak persuasion / encourageof housing consumption

Conflict might occur with other social policy

Moral hazard


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Sources used

Glaeser, E. L. & Shapiro, J. M. (2002) The benets 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/Price-History

Arjen van Dijkhuizen, Financial Stability Division, The NederlandscheBank, Amsterdam, theNetherlands. http://www.biz.org/publ/wgpapers/cgfs26dijkhuizen.pdf

Martin Koning, Naar een vloeiende woningmarkthttp://www.encore.nl/publications/Naar%20een%20vloeiende%20woningmarkt.ppt

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

Marietta Haffner and Paul de Vries, Dutch house price fundamentals, Paper presented atAustralian Tax Research Foundation Housing and Taxation Symposium, Melbourne, 11February 2009

OECD (2004) Economic Surveys, Netherlands, Paris.


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Minimale interventie (1)

beleid gericht op externe effecten

liberalisering grondbeleid met harde aanpak

machtposities

inkomenssteun kwetsbare groepen

eigendomsneutrale behandeling:

afschaffen prijsregulering en renteaftrek


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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


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Gerichte interventie (1)

rol sociale huursector blijft behouden

inkomenstoetsing prikkels voor aanbodsreacties

verruiming ruimtelijke beleid

versobering hypotheekrente algemeen fiscaal voordeel voor huurders


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Gerichte interventie (2)

voordelen:

geen belemmeringen keuze huren of wonen

minder wachtlijsten sociale huurwoningen

meer doorstroming

nadelen:

subsidiering blijft omvangrijk

voldoende prikkels woningcorporaties ?


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Solution limitations

1. Government has to respect existing contracts

2. Gradual phase out through:a) nominal limit of tax-deductabilityb)

3. Check Boelhouwer, Peter , Haffner, Marietta ,Neuteboom, Peter and Vries, PaulDe(2004)'House prices and income tax in theNetherlands: an international perspective',

Housing Studies, 19: 3, 415 4324. Arguments for continued government

intervention/involvement


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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

towards a way out of the distorted dutch housing market

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