Deflating housing bubble at heart of Netherlands’ economic blues

Haarlem, officially the best shopping city in the Netherlands , looks like many picturesque Dutch towns: a medieval church surrounded by a hedonistic cornucopia of pedestrian shopping streets.

Normally those streets are filled with confident window-shoppers, but these are not normal times, and Dutch consumers are feeling anything but confident. Household spending has been falling for three straight years, and it dropped again 2.4 per cent year on year in the second quarter, dragging the entire economy down with it.

While solid growth in Germany and France pull the eurozone out of recession, and the British economy gathered speed, the Dutch economy shrank for the fourth straight quarter, by 0.2 per cent. Dutch exports are doing well, but domestic consumers have been spooked by a combination of falling housing prices, unemployment at 7 per cent and rising, and a seemingly never-ending series of government austerity measures .

In Haarlem, many storefronts stand empty, part of a national wave of bankruptcies that rose to its highest level ever over the past three months.

Leontien Blauw, manager of a chic design furniture store where sales have fallen heavily over the past year and a half, blamed consumers’ anxiety on both the economy and the government’s austerity policies.

“When your child subsidies are being cut, and your mortgage tax deduction may be cut, and you are uncertain about your job, then lots of people decide, maybe we can sit on that old sofa for a couple of years,” Ms Blauw said.

At the heart of the Netherlands’ persistent case of the blues, economists agree, is a slowly deflating housing bubble. Property values in the Netherlands rose as much in the boom years before 2008 as in peripheral European countries like Spain, leaving the country with a mortgage debt load larger than any other in the eurozone.

The bubble was fuelled by the fact that Dutch mortgage interest was fully tax deductible, a strong incentive in a country of high income taxes. Dutch banks developed a series of unique, complex mortgage products to help borrowers maximise the tax benefits.

Prices have fallen 21 per cent since their 2008 peak, leaving 30 per cent of all Dutch mortgage holders underwater, owing more than their houses are worth. Few experts think the bottom has been reached, and with their net worth falling, homeowners are spending less.

One reason prices are still falling is that the government is moving to bar some of those exotic Dutch mortgage products, in order to reduce the risky debt load. But the cabinet, a testy coalition between the centre-right Liberals and centre-left Labour party, has announced and then withdrawn several versions of the mortgage reforms, adding to homeowners’ mistrust.

“It’s not certain what measures the government is going to take,” said Ruth van de Belt, an economist at Rabobank who specialises in consumer confidence. “They keep on announcing new ones, and that damages consumer confidence.”

“We don’t have the feeling that this is it,” said Dimitry Fleming, an economist at ING. “This is already about the third mortgage package in the past two years.”

The mortgage rules are not the only measures the government has changed repeatedly. A plan to make health insurance payments income-dependent was announced with fanfare when the cabinet took office in November, then withdrawn under fire for costing some taxpayers thousands of euros.

The sharp downturn in the economy in late 2012 forced the new cabinet to implement billions of euros in unexpected austerity measures to try to meet the EU’s 3 per cent deficit limit, slashing childcare subsidies and raising the value added tax. This week’s disappointing numbers mean the government must find a further €6bn in cuts for 2014, including extending a freeze on government employees’ salaries.

Those cuts, according to most banks’ projections, will probably wipe out the modest growth Dutch authorities had been predicting for 2014.

Moreover, the government will need to win support from several opposition parties to pass both its reforms and its austerity measures through the upper house of the Dutch parliament this autumn, adding further to the uncertainty.

The government and several opposition parties struck deals on housing policy, healthcare, and pension reform this spring, and both sides are insisting that those deals will stick. Wouter Koolmees, financial spokesman of the opposition left-liberal D66 party, said his party would back the measures in the Senate, as long as they are not watered down through further compromises.

But the Dutch consumer still does not trust that the new deals are final. And Mr Koolmees, too, says that the government must stop fiddling with its reform measures and introducing new austerity measures unpredictably.

“If there’s constantly this sword of Damocles hanging over the market, then nobody’s going to spend anything,” Mr Koolmees said.