The Crash Of The Dutch Housing Market Reminds Us Of A Much Older Market
Sober Look | Aug 26, 2012 02:21AM ET
From the country that brought us the 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.
CS: We think that negative headlines could arise during the process of forming a new government. The Socialists 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.
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