In determining the new policy in the coming years, the Dutch government will be inspired by the policies elsewhere in Europe. The Netherlands is of course not the only country that feels the need to "modernize" the housing market. Most reforms in the purchasing sector have taken place in many countries towards less government subsidies. We review a number of measures in neighboring countries and the effects they have had on the housing market there. Ultimately, we will try to map out in a number what the future of the Dutch housing market may look like.

1. Tax treatment of the mortgage debt (mortgage interest deduction)

The mortgage interest deduction can be phased out in three ways: the deduction rate, the mortgage sum and the deductible interest amount. Although the maximum deduction rate before the reforms in the different countries does not differ much, the transition process and the final picture differ widely. In the UK, for example, the maximum deduction rate has been gradually reduced from 60% to 0%.

The Scandinavian countries, on the other hand, have kept the mortgage debt in the income tax. The rate reduction has been affected in these countries with the dual income tax system. Labor income is taxed with progressive rates, but capital income has been subject to a proportional rate since the reforms.

In Germany, the interest on mortgages taken out to finance the owner-occupied home cannot be deducted. Until 1987 there was a notional rental value in Germany, from which the mortgage interest paid could be deducted.

2. The notional rental value

The tax levied on the notional rental value of a home has been abolished in most countries in Europe when homeownership is taxed fiscally, or replaced by the real estate tax, or an extension thereof. Exceptions are the Netherlands and Norway. The shift from the notional rental value to the property tax arises from the idea that homeowners have a greater understanding of the property tax, because it is seen as a contribution to local facilities.

3. Transfer tax

Many countries levy a transfer tax. The design has been adapted in various ways. On the one hand, the UK, Finland, and Sweden have implemented a (sometimes temporary) cut in transfer tax. Start-ups up to the age of 40 have been exempt from this tax in Finland since the reforms and all start-ups in the UK benefit from a discount on the transfer tax. On the other hand, an increase in transfer tax has taken place in several federal states. The rates vary from 3.5% to 6.5% of the purchase price.

4. Building savings system

In Germany, there is a construction savings system that makes it financially attractive to save for a down payment on the purchase of an owner-occupied home through interest premiums (the government subsidy amounts to approximately 9% of the amount saved). Interest premiums are capped, however, and are also limited to low-income households. In addition, savers who commit to the program are entitled to a loan. This combines saving and borrowing for your own home into a product. In any case, this system provides a greater degree of certainty about interest rates, but not a large interest advantage.

5. Tax treatment of equity invested in the owner-occupied home

In Norway, tax is levied on the balance of assets and liabilities. However, because of an exemption limit and other housing subsidies, the capital tax is of little significance for homeowners. 25% of the appraisal value is taxed and the appraised value does not exceed 20%-30% of the market value of a home.

Norway also has a capital gains tax, but as in most countries, the capital gains realized on the sale of the owner-occupied home are not accounted for in taxes. In many other countries, no wealth tax is levied, and if a wealth tax is levied, the value of your own home is not de jure or de facto. This has to do with a high exemption threshold. Before the tax revision in 2001, part of the value of the owner-occupied home was added to the capital under the wealth tax in the Netherlands.

6. Loan-to-value (LTV) limit

The UK and Sweden have made a change in the maximum loan amount for financing the home compared to its value (maximum LTV ratio). In the UK, the LTV limit was revised upwards in the 1990s by 15 percentage points to 110%. In the same period, the LTV limit in Sweden was increased by 5 percentage points to 85%. IMF research into financial stability and prudent macroeconomic policies in 49 countries shows that about 40% of the countries have some form of LTV limits.

7. Loan-to-income (LTI) limit

Limits on the maximum LTI ratio are common, usually in combination with other measures to limit the size of loans. Countries that have recently introduced or tightened an LTI limit include South Korea (2002), Greece (2005), Croatia (2006) and Norway (2010). Since 2014, the UK has applied a maximum LTI ratio of 4,5 times the gross income of households. From an international perspective, the LTI limit in the Netherlands is strict.

8. Other subsidy measures

In the UK, phasing out the mortgage interest deduction has been accompanied by an increase in the use of income support for mortgage interest (ISMI). This scheme helps homeowners who can no longer bear the mortgage interest. It is a safety net for homeowners who have encountered payment problems as a result of the cutback of the tax subsidy on their own homes. The scheme still exists, but has been severely curtailed. The Swedish government guaranteed the mortgage sum up to 95% of the construction costs of the owner-occupied home, but in 1992 this guarantee was limited to 30% of the production costs. In addition, homeowners have since had to pay a premium for the guarantee.

The consequences for the purchasing sector

From the development of average real house prices in the four years before and in the four years after the main rate reduction, it can be deduced of the maximum rate in the United Kingdom (UK). Norway and Finland have not been accompanied by a decrease in the average real house price. In Germany, Denmark and Sweden, house prices have fallen after a rate cut. The specific consequences of the various reforms are, of course, difficult to distinguish from cyclical influences on the housing market. House prices in these countries could therefore also have declined without a rate decrease. The divergent trends in house prices after reforms can also be partly attributed to interest rate developments. It appears that in the countries where prices have fallen, real interest rates rose during the same period - with the exception of Germany.

In the reforms, the transition process is also different per each country. The UK is distinguished in that the tax interventions have been implemented relatively gradually and step by step. Due to the non-indexed maximum on the mortgage sum, in the context of nominally rising house prices, a relatively smaller proportion of the interest fell below the deduction. Finland also applied a ceiling for the interest deduction prior to the rate cut. A second factor that distinguishes the UK from the Scandinavian countries is the accompanying policy and the stimulus measures. In the UK, the tapering of mortgage interest relief has gone hand in hand with greater use of the scheme that helps homeowners with payment problems. The cost of the scheme increased explosively from GBP 31 million in 1979 to GBP 1.2 billion in 1993. In addition, demand for owner-occupied homes has been stimulated with an increase in the LTV limit to 110%. Denmark and Sweden actually increased the initial costs of a mortgage through the obligatory combination mortgage and a lower government guarantee, respectively. Housing market reform was also accompanied by a sharp decline in the number of transactions in both countries.

If the above makes one thing clear then it is that reforms abroad offer insight into developments, but not a ready-made solution. As we would have expected in advance, each country sets its own accents based on its own unique situation. Therefore, foreign countries should at most serve as a source of inspiration for future Dutch housing policy. Successful reforms in neighboring countries cannot be translated one-on-one into the Dutch situation. 

Source: Dr. C.A.M. Wijtvliet