The Crash of the Dutch Housing Market Reminds us of Older Bubbles
By Walter Kurtz, Sober Look
From the country that brought us the tulip mania - roughly on the 375th anniversary of the tulip bubble crash – comes the latest property market correction in the Eurozone.
WSJ: – The slump in the Dutch housing market deepened in July as prices posted the steepest drop on record, highlighting the challenges facing the Netherlands ahead of next month’s general elections.
With prices now plumbing levels last seen in 2004, the downturn is weighing heavily on household consumption and has raised concern about the country’s huge mortgage debt pile, among the largest in Europe
So far this is not nearly as bad as the property market corrections in Spain or Ireland, but this was certainly unexpected. And now just as in the US, there is no shortage of blame to go around.
WSJ: – Regulators blame loose lending practices in the late 1990s and early 2000s and a tax relief program for home buyers that distorted the Dutch housing market. As a result, they say, the country’s banks have become too reliant on wholesale funding to finance their large mortgage books. At around €640 billion ($790 billion), Dutch mortgage debt is roughly the size of the country’s entire economic output last year.
The Dutch central bank warned earlier this year that a prolonged slump poses a risk to the financial system as banks could face rising loan losses and more trouble securing funding. It could also squeeze public finances, as the Dutch government guarantees around €140 billion in home loans.d concern about the country’s huge mortgage debt pile, among the largest in Europe
What got banks, politicians, and regulators really spooked was the sharpness of the correction. It is also an indication that the Eurozone “core” is not immune to the crisis.
Similar to the political backlash that took place in the US after the housing crisis, the Dutch government remains vulnerable to significant changes that could have a Eurozone-wide impact.
Source: Credit Suisse
CS: – We think that negative headlines could arise during the process of forming a new government. The Socialist are leading in the polls and they could become the strongest party. They propose a longer time frame – 2015 instead 2013 – to reach the 3% budget deficit. They also reject the European fiscal pact.
And similar to the tulip crash, it is the leverage that makes this housing correction so dangerous.
CS: - Dutch household liabilities are the highest in Europe, mainly due to the high residential mortgage debt. Therefore, the adjustment in the housing market has a negative wealth effect which should have a relatively larger impact on household spending, and thereby, on GDP growth.
With 80% of the Netherlands’ GDP coming from exports, the nation is already highly exposed to global growth. This housing market decline could tip the Dutch economy into a recession.
7 Comments
It’s a good idea to publish posts like this that remind us that bubbles are everywhere. Why ? Because private debt has been deliberately left to grow wild for two decades as an antidote to the shrinking incomes of the middle classes almost everywhere. Private debt is the problem and deleveraging is still not happening or happening too slow and too little. Therefore the post is almost fine but this statement “…but this was certainly unexpected…” is wrong. For any bad debtor there is a bad creditor and the costs of this mess must be equally split, but the creditors want to be saved at any cost. We’re going to an epic crash, a huge deflationary shock which could be the trigger of an epic inflationary explosion.
It would be simple in theory to convert private debt to an asset, and then remove it from the books. Quantitative ease the whole population using BILLS. The interest on the bill can be a one time fee payable to the bearer. This is something similar to Keens’s idea, and I’ve written him as well.
For example in America, the Treasury issues a Bill with a named bearer, and mails it to all of the citizens of the country. The bearer uses it to pay down some amount of their mortgage. The bank holds the bill and waits for the FED to transfer it to their books. The FED creates new money and trades out for the BILL. The Bill then goes onto the FED’s books, expanding their ‘asset’ column, and then it dies. The FED cannot re-spend the Bill as is legally stated on said bill. When the new money from the FED is transferred to the bank, the liability column of private debt is driven down.
To pay the bearer the FEE required of the Bills, the Treasury would have to deficit spend the FEE’s upon demand. In reality, the Treasury could cut a check for the FEE sometime after the Bill was deposited at the bank.
In this way, private debt is turned into an asset and disappears. Of course it remains on the ledger at the FED, but it just collects dust. The shape of the debt problem is morphed into an asset that stops circulating.
Those people not in debt have to spend their bills into a holding company that directs the money into rebuilding infrastructure, or one of the means of production. A Bill can state how it is to be spent as it is a legal instrument (like money). We could create a state banking system with the new “assets” and allow the States to leverage the asset into economic growth. In other words, the investment bank or public bank could leverage additional money on top of the asset, and said new money is to be spent properly. Public banks would also be better at preventing future bubbles. At the end of the bills period, they have to be returned to the owner or rolled over. A provision on the bills for this part of their journey would allow roll over rather than paying off the FEE.
In effect, the small fees on each bill leverage a lot of economic activity. Debt deflation recedes into the mirror and sidelined money jumps into the market, creating additional activity.
Private banks loose future revenue, but boo hoo. Some of the debt paydown may pass through to bond holders, who would just use the new dollars and probably asset swap again on the market, driving down interest rates.
The big problem is getting rid of private debt, so we need some way of doing a jubilee.
I can say just YES. You are right. There is nothing unexpected on it. Who has been to Nederlands and knows about the cost of living knows it was often a topic of the public debate.
Next country I expect to have big problems is Canada. As for Vancouver Housing Market the fall has already started. Also the levels of household debt are extremely high.
Now that the European real estate crash has spread from Ireland to Spain and to the Netherlands, what countries are next on the list? Is London real estate due for a fall?
England, Norway, Finland, Poland, ………….
Very long list indeed but real estate is not the only one big bubble in town. Most of commodities are in bubble territory since year 2000. Dan Dicker, Chris Cook and many others wrote about the oil market, the fact that copper is used by chinese companies as collateral is of widespread knowledge etc… But rolled futures on commodities are on the books of so many pension funds which already owns lot of worthless equities and bonds. So at last, we all know that the banking cartel is at the head of this huge fraud and that the system is so unstable and dangerous that probably is too late to avoid a collapse. I don’t know when and the trigger, there are so many. Frankly a financial meltdown in the near term is an opportunity to reform our way of life from the ground and the last opportunity to avoid a catastrophic ecological crisis well before the end of this century. Enjoy a good life until it lasts.
London is overdue for a significant correction. The only problem is that currently there are hoards of euro exiles buying up homes in London. Holding up prices. So much so that foreigners made up more than 60% of sales this year. Only the very rich can afford to buy in London now. Everyone else is priced out of the market.