Kingdom of the Netherlands—Netherlands: Selected Issues and Analytical Notes
Author:
International Monetary Fund
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Publication Date:
21 Jun 2011
eISBN:
9781455286645
Language:
English
Keywords:
ISCR; CR; Netherlands; price rise; price bust; price collapse; price growth; price ratio; Housing prices
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Important issues of the Netherlands are discussed. Openness to trade has benefited the Netherlands before the crisis and has supported the recent recovery process. However, both financial openness and trade linkages have also been a transmission channel for the financial crisis. Synchronized fiscal tightening across Europe has important spillover effects for GDP growth. The improvement on the supply side of credit has contributed to a normalization of the credit market. However, the recent increase in the financial stress index indicates that the situation is still fragile.

Abstract

Important issues of the Netherlands are discussed. Openness to trade has benefited the Netherlands before the crisis and has supported the recent recovery process. However, both financial openness and trade linkages have also been a transmission channel for the financial crisis. Synchronized fiscal tightening across Europe has important spillover effects for GDP growth. The improvement on the supply side of credit has contributed to a normalization of the credit market. However, the recent increase in the financial stress index indicates that the situation is still fragile.

Analytical Note 4: Recent Developments in the Dutch Housing Market1

1. Dutch house prices rose steeply up until 2008 but suddenly reversed, raising fears of a collapse. House prices rose by 6 percent (annualized) in nominal terms on average from 2000 to the third quarter of 2008. This was well in excess of economy-wide inflation: in real terms, house prices rose by 3½ percent over the same period. The rate of decline from the peak in 2008 was severe even by the standard of the house price slump of the late 19s and early 1980s: nominal (real) house prices fell by -5 (4) percent in the four quarters from 2008Q3 (Figure 4-1). Such a sudden reversal and steep decline raised fears that wealth effects would weaken consumption and damage banks’ balance sheets, leading to further declines in a self-perpetuating cycle.

Figure 4-1.
Figure 4-1.

Dutch House Prices

(2000q1 = 100)

Citation: IMF Staff Country Reports 2011, 143; 10.5089/9781455286645.002.A004

Source: OECD; IMF staff estimates.

2. Risks to the housing market appear finely balanced. The Dutch experience of house price rises was less severe than those of other countries (¶3), and a variety of indicators and models of equilibrium housing valuations indicate that the Dutch housing market is not obviously overvalued (¶4–6). Household debt is high and growing as a proportion of disposable income, but the liquidity of household balance sheets has improved following the downturn (¶7). House prices themselves appeared to have stabilized across all types and regions, but may now have resumed a gradual decline, consistent with flat sales (¶8).

3. House price fluctuations have not been as severe as for other economies. It is useful to first compare house prices in the Netherlands with those in the euro area, given that those economies have common monetary policy conditions. From 2002Q1 to 2006Q3—the period during which all euro-area house prices were rising—Dutch house prices rose by 22 percent, whereas other euro-area house prices rose by 56 percent on average.2 The “anglosaxon” economies (Australia, Canada, New Zealand, U.K., U.S.) saw house price rises of 64 percent during the same period. Declines from recent (idiosyncratic) peaks to most recent observations have been less for Dutch house prices than other euro-area economies over the same period such as Denmark (-17 percent) and Spain (-12 percent).

4. Indicators of affordability are still elevated. Often-used indicators of affordability such the ratio of house prices to income and the ratio of house prices to rents have fallen from their peaks in 2008, but still remain high by the standards of the past 40 years (Figure 4-2).3 However, the rate of change of these indicators was not as steep during the boom period as it was for the price levels themselves. Moreover, there is evidence that supply constraints play a significant role in Dutch house prices,4 which would explain a trend increase in relative house prices.

Figure 4-2.
Figure 4-2.

Dutch House Price Ratios

(2000q1 = 100)

Citation: IMF Staff Country Reports 2011, 143; 10.5089/9781455286645.002.A004

Source: OECD; IMF staff estimates.

5. Macroeconomic indicators of house price busts do not show a strong risk of a house price collapse in the Netherlands. Previous research indicates that useful indicators of ensuing house price busts include a high growth rate in the credit to GDP ratio and negative and weakening current account balances.5 Credit growth was strong, relative to nominal GDP. But the current account balance has been resolutely in surplus (Figure 4-3).

Figure 4-3.
Figure 4-3.

Indicators of House Price Busts

Citation: IMF Staff Country Reports 2011, 143; 10.5089/9781455286645.002.A004

Source: IMF staff estimates.

6. Econometric models applied to latest observations do not indicate obvious overvaluation from current levels. Applying the econometric models in IMF (2009b) to more recent data shows very little evidence of overvaluation at current levels. The models cover a range of single-equation and corresponding VECM reduced-form specifications, and a Probit model. In the former, house prices are regressed on measures of affordability, income, user cost of housing, and/or existing housing stock. The Probit model attempts to model the probability of having reached a peak, implying a forthcoming downturn in prices. The specifications are described in the Appendix. The models imply the same conclusions as in IMF (2009b): there is no obvious evidence of significant overpricing in Dutch house prices.

7. The vulnerability of Dutch household balance sheets has been a concern. Mortgage debt as a proportion of disposable income and GDP has steadily increased (Table 3-1), despite an internationally-high saving rate than increased following the crisis. However, the quality of Dutch household balance sheets has improved. One measure of this is a version of the “quick ratio” often applied to corporations—the ratio of liabilities to liquid assets (deposits and currency). In the period leading up to the crisis, the change in the quick ratio was highly correlated with house price growth. The relationship fits the Netherlands particularly well; the increase in the ratio was slightly higher than average, behind Ireland, Spain, Greece, Portugal, Finland and Norway (Figure 4-4). However, since the crisis hit, Dutch households have increased deposits and mortgage growth has slowed dramatically, such that the ratio of mortgages outstanding to liquid deposits has reduced considerably (Figure 4-5).

Figure 4-4.
Figure 4-4.

Recent House Price Booms and Household Balance Sheets

Citation: IMF Staff Country Reports 2011, 143; 10.5089/9781455286645.002.A004

Figure 4-5.
Figure 4-5.

Ratio of Mortgages Outstanding to Redeemable Deposits

Citation: IMF Staff Country Reports 2011, 143; 10.5089/9781455286645.002.A004

Source: Statistics Netherlands; IMF staff estimates.

8. House prices in the Netherlands appeared to have stabilized during 2010, but may have resumed a downward slide. Nominal house prices had stayed essentially constant from 2009Q3 to the middle of 2010, although real house prices fell slightly over the same period as positive inflation returned. However, house prices appear to have resumed a downward slide since the middle of 2010, albeit at a slower rate than in 2009 (Table 4-2). This would appear to be consistent with low sales and anecdotal evidence of increased time on market (Figure 4-6). However, the price data might be distorted by compositional effects; on a like-for-like basis, prices might actually have increased. In short, the most recent data are sending mixed signals.

Table 4-1:

Mortgage Stock to GDP

(percent)

article image
Source: Dutch National Bank; staff calculations
Table 4-2:

Prices of Existing Houses

article image
Source: Dutch Land Registry Office
Figure 4-6.
Figure 4-6.

Number of Registered Sold Houses

Citation: IMF Staff Country Reports 2011, 143; 10.5089/9781455286645.002.A004

Source: Dutch Land Registry

Appendix: Regression and Probit Model Specifications

article image

References

  • International Monetary Fund (2009a), “Lessons for monetary policy from asset price fluctuations,” Chapter 3 in October 2009 World Economic Outlook (Washington: International Monetary Fund).

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  • International Monetary Fund (2009b), “Dutch housing markets: what went up will come down?” Analytical Note 1 in Staff Report for the 2009 Article IV Consultation (Washington: International Monetary Fund).

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  • Kannan, Prakash, Pau Rabanal, and Alasdair Scott, 2009, “Leading indicators of asset price booms,” Journal of Applied Economics,

  • Kranendonk, Henk, and Johan Verbruggen, 2008, “Are houses overvalued in the Netherlands?” CPB Memorandum 200.

  • Vermeulen, Wouter, and Jan Rouwendal, 2007, “Housing supply in the Netherlands,” CPD Discussion Paper No. 87.

1

Prepared by Alasdair Scott.

2

This value is a simple average across 9 euro area economies (Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, and Spain) and is not weighted (such as by GDP, population, or housing units).

3

The distortions in the Dutch rental market (see Analytical Note 9) imply that the price-rental ratio might be a less useful indicator than in other economies.

5

See International Monetary Fund (2009) and Kannan et al. (2009).

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Cover IMF Staff Country Reports
Kingdom of Netherlands: Netherlands: Selected Issues and Analytical Notes
Author:
International Monetary Fund
Volume/Issue:
Volume 2011: Issue 143
Publisher:
International Monetary Fund
ISBN:
9781455286645
ISSN:
1934-7685
Pages:
144
DOI:
https://doi.org/10.5089/9781455286645.002
Figure 4-1.

Dutch House Prices

(2000q1 = 100)
Figure 4-2.

Dutch House Price Ratios

(2000q1 = 100)
Figure 4-3.

Indicators of House Price Busts
Figure 4-4.

Recent House Price Booms and Household Balance Sheets
Figure 4-5.

Ratio of Mortgages Outstanding to Redeemable Deposits
Figure 4-6.

Number of Registered Sold Houses