A rise in housing prices will be a warm welcome

Jos Koets, an accredited mortgage consultant

Jos Koets, accredited mortgage consultant, talks about the current and future situations concerning the housing crisis. In his article he describes, among others, several effects that could arise, political interventions and the potential upcoming buyer crisis.

Many people rightly question whether the housing crisis is over. It is difficult to answer this question since there may arise some unexpected situations. According to experts, the worst is behind us and figures show that there are already some bright spots and that there will be an increasingly amount of these bright spots the upcoming years. The number of houses sold increases and the average housing price does not fall anymore. Some positive insiders even expect that housing prices will rise again this year. I have always been in favor of watching at those numbers that future buyers and current homeowners have to deal with.

Lower mortgage

In 2014, the maximum mortgage depending on the income has been lowered again. This trend has been going on for years. Since incomes have not risen much the past years, future buyers are obligated to find a cheaper house due to the lower mortgage they can get. Table 1 describes the maximum mortgage in 2013 and 2014 (4.0% mortgage). Moreover, I expect that interest rates will fall even further in 2014. I have also made a calculation of the maximum mortgage with an interest rate of 3.5%.

Table 1

Interest rate 4% Interest rate 4% Interest rate 3,5%
Income  in euros Income in euros 2013 2014 2014
Maximum mortgage Maximum mortgage Maximum mortgage
25.000 0 117.822 106.913 113.667
25.000 15.000 192.006 171.060 189.291
35.000 0 168.005 155.787 165.629
35.000 15.000 240.008 222.553 236.613
45.000 0 219.934 200.297 212.952
45.000 20.000 323.356 298.318 307.597
50.000 0 244.371 222.553 236.613

From table 1 can be shown that someone’s maximum mortgage is being decreased on average with 10% in 2014. The interest should decline with more than 0.5% to compensate for this effect.

Measures from The Hague

In recent years The Hague caused a lot of unrest on the housing market. Measure after measure is introduced. It is distressing to read how many measures have been introduced from 2001. There have been made far too many changes to the existent regulations. These changes did not contribute to the balanced housing market, which is needed. I will enlighten about two of these regulations.

Mandatory redemption from 2013

From 2013 starters who buy a home, are obliged to fully redeem their mortgage by means of an annuity and/or linear mortgage to still be able to profit from the tax rebate on mortgage interest (hypotheekrenteaftrek). This implies that it is still possible to have an interest-only mortgage – no redemption during the maturity of the mortgage – but then there is no possibility of a tax rebate on the interest. The maximum duration of this tax rebate is 30 years. The ones that already closed an interest-only mortgage and decided to move, may bring their current mortgage under strict conditions. This mandatory introduction is “forced” by Brussels. Brussels thinks that the Dutch mortgage debt is too high. In 2006 the total mortgage debt was 516.4 billion euros, according to CBS. In 2012 this had risen to 675.2 billion euros. The tax rebate on interest that is already paid by the government is roughly 15 billion, which is obviously a huge amount.

Many starters choose an annuity mortgage. A fixed monthly payment is related to this type of mortgage. Within this monthly payment amortization and interest on the outstanding mortgage is included. The mortgage is getting lower every month because there is being redeemed more each month. The disadvantage of this type of mortgage is that the deductible interest is less each month. This increases the net monthly costs. The mortgage is becoming increasingly expensive every month. Table 2 shows an example with the following assumptions:

Table 2

Mortgage and property value € 200 000

Mortgage interest rate 4%

Tax benefit 42%

Year       Gross Monthly                  Net Monthly      Mortgage Amount
1                              955                                         710                         196.478
5                              955                                         739                         180.895
10                           955                                         776                         157.568
15                           955                                         821                         129.086
20                           955                                         874                           94.308
25                           955                                         937                           51.846
30                           955                                         955                                    0

On average 20% of the mortgage is already repaid after 10 years for the annuity mortgage. After 20 years, this is roughly 50% of the mortgage amount. In the last 10 years of the mortgage contract, nearly half of the mortgage is being redeemed. The annuity mortgage could be the “strangle mortgage” of the future. The net monthly costs rise and the mortgage descend too gradually the first years. Many will disagree with me. They will come up with arguments that wages and housing prices rise in the future and, moreover, that inflation is applicable. This seems logical, but no one can guarantee that this will actually happen.

Study Debts

Another major problem for the housing market is the student loans. Someone who buys a property must report his student loan. This debt is included in the calculation of the maximum mortgage. Same fact applies if someone has a consumer loan. The difference between both of them is the percentage that will be used when calculating the maximum mortgage. For a consumer loan this percentage is equal to 2% of the loan amount and for a student loan this is 0.75%. What exactly are the consequences of a student loan? I will demonstrate this by means of an example with the following principles applied:

–          An annual income of 35,000 euros

–          An original student loan of 30,000 euros, 5,000 euros through repayments

–          GHF-interest rate of 5%

–          Calculation: 0.75% x student debt


–          Maximum borrowing capacity 150,000 calculated without student loans

–          Maximum borrowing capacity 107,500 calculated without taking into account repayments

–          Maximum borrowing capacity 142,000 calculated with repayments already made.

In any case, a current student loan has the effect that someone can get a lower mortgage. However, there appear to be two calculations possible. There are no clear rules on the calculation. Each bank has the authority to decide how to deal with study debt. So it is possible to assume the amount of the student loan or to assume the amount that still applies after the repayments are made. Someone who wants a mortgage with NHG will be worst off since it assumes the amount of the student loans.

Buyer crisis

Many people see a buyer crisis as part of the housing crisis. I believe that this is incorrect. In a housing crisis, there are numerous prospective buyers who can buy a house but postpone this because of certain circumstances (for example, the uncertainty of falling housing prices). When there is a buyer crisis someone wants to buy a house, but this is simply not possible. The buyer crisis will have a greater effect than the housing crisis. The question rises how this buyer crisis is going to develop, while it is now just at the beginning. The Hague and Brussels are partly responsible for this. This tax advantage will not disappear in the coming years. Every political party shall endeavor to avoid this issue (completely eliminating this tax advantage). However, there is a kind of toy that is able to reduce this tax advantage on interest payments drastically. This is called the ‘Eigen Woning Forfait’.

The EWF is an extra payment and expense for the homeowner. The EWF is determined by multiplying the property value with a percentage. In December 2013, Minister Blok raised the rate from 0.6% to 0.7%. This action, which I personally find misplaced, shows that the government does not care for the homeowner. If the government decides to increase the rate with for example 0.1%-points each year, it will decrease the tax advantage on the interest payment. The net monthly costs will rise at least with a few euros every year. This seems insignificant, but there are over 3.7 million homeowners who have to face this increase.

Brussels and OECD

Lastly, the EU is increasingly going to interfere with the Netherlands. The OECD has already claimed for a maximum mortgage (for future buyers in the Netherlands) of 80% of the value of the property. This means that starters need to bring a growing number of their own resources. What are the consequences for a buyer who purchases a house of 200,000?

Purchase price                                  € 200,000

Costs of purchase (5%)                  €   10,000

Required mortgage                         € 210,000

Maximum mortgage (80%)          € 160,000 (80% of 200,000)

Own resources needed                €   50,000

Assume this starter has also got a student loan. Someone who wants to buy a house will first have to save many years. At the moment people in the beginning twenties of their lives are able to buy a house. This will only be able in later years after the introduction of the 80%-rule. I expect the average age to be in the end of the twenties. Moreover, the OECD wants people with an interest-only mortgage to actually redeem their mortgage. The pressure on the Netherlands to take further action is being increased the upcoming years. Chances are high (which is shown in the past) that further action will be taken at the expense of the homeowners. Within the next few years the housing crisis may run at the end, but I believe that the buyer crisis is coming. This buyer crisis will be even worse than the housing crisis.

This article was written in May 2014