The future of Dutch housing policy (part 2)

The future of Dutch housing policy (part 2) 

Tax handling of your own home


The Netherlands has a long tradition of housing policy. Affordability (price), availability (supply, volume) and quality of the housing stock have been the main objectives of this policy for decades, for which these aforementioned instruments such as rent regulation, the domain of housing corporations, the mortgage interest deduction, the transfer tax and the notional rental value have come into existence. Several reforms have already been implemented in the housing market. In this document, we try to identify the broad socio-financial and economic effects of possible further reform measures.

We will pay attention to the tax treatment of the owner-occupied home. It has been the subject of discussions for years as the recent economic crisis has also generated considerable attention for the relationship between this tax treatment and the level of mortgage debt. The fiscal subsidization of the owner-occupied home reduces the net housing costs of the owner, but this also leads to a disruption of consumption. After all, this is a tied subsidy that disrupts the free choice between housing consumption and other consumption. Moreover, the subsidy largely translates into higher gross housing costs through higher house prices. After all, the subsidy stimulates demand, while the supply of housing in the Netherlands is not very elastic as a result of the spatial planning policy.

The effect of most of the measures in this section is that the aforementioned misrepresentation in housing consumption will be reduced, but it is also possible to subsidize housing through the tax regime.

  1. 1. Further and accelerated reduction of the deduction rate 

The rate at which the mortgage interest may be deducted will be reduced by 1% per year from 2018 to 30% per year. The reduction of the rate is therefore 0.5% per year more than is currently planned, and ends at a lower level (30% instead of 38%). As a result of this measure, the average tax subsidy rate structurally falls by 1.6% to a level of 26%. Due to the modest decrease in the total average subsidy rate, the structural consequences for the housing market of this measure are limited. House prices structurally fall by 1% compared to the original design. There is a small shift from the owner-occupied market to the commercial rental sector.

  1. 2. Capping deductible interest 

The deductible mortgage interest will be capped in 2018 at a maximum of 20,000 euros per year per household. The vast majority of Dutch households with their own homes will not notice this measure. Residents of owner-occupied homes with a mortgage paid an average of EUR 8,300 gross mortgage interest in 2012, and EUR 8,000 in 2015 due to low-interest rates. However, for the group of households affected by this measure, the effects on net housing costs can be significant, and the ultimate effects of this measure on the housing market are limited.

  1. 3. Increase notional rental value 

The rate of notional rental value for homes with a WOZ value between 75,000 and 1,050,000 euros will increase in one go by 0.25% in 2018 from 0.75% to 1%. Since the addition applies to the entire value of the home, the basis of this measure is greater than measures that only affect the mortgage interest deduction. The increase in the notional rental value reduces the average tax subsidy rate for owner-residents by 2%. This results in an initial house price drop of just under 3%. This will lead to a decrease in new construction in the market segment, as a result of which the volume of residential consumption will decrease slightly in the long term. This supply reaction partly cancels out the initial house price decline.

  1. 4. Abolition of "Wet Hillen" 

The deduction due to little or no home acquisition debt, the so-called Wet Hillen from 2005, will be gradually abolished in four years from 2018. As with measure number 2, the number of households affected by this measure is limited. Just over 20% of households benefit from the exemption. Due to the limited scope of the Hillen Act, the structural effects for the average household are limited. As a result of this measure, house prices in 2021 will be 1.8% lower than currently foreseen. The share of homeowners with a capital risk will increase by 1.4% and will amount to 12.4% in 2021.

  1. 5. Restore mortgage interest deduction 

This policy measure reverses partially announced and already introduced measures to limit the mortgage interest deduction. As of 2018, the allowed paid mortgage interest was deducted again at a maximum of 52% for the highest incomes. As a result of this measure, the average tax subsidy rate increases structurally by 1.2%. This results in slightly higher house prices and a slightly increased share of purchase consumption. As house prices rise by 1.2%, the percentage of households that have a wealth risk in 2021 is 0.7% lower as a result of this measure.

  1. 6. Own home to box 3 with subsidy 

In a period of thirty years, the deduction rate for mortgage interest in box 1 will gradually decrease from 2018 to 30% in 2048. At the same time, the rate for the notional rental value will decrease to 0% in 2048. In that year, the owner-occupied home and the associated debt as portray in box 3. In addition, each household will receive an additional exemption (in box 3) on top of the existing exemption in the amount of the WOZ value of the home. Because of the mortgage debt, a large part of the households will then have a negative assessment that can be paid out. The negative balance is limited to the value of the mortgage loan, so that other debts have no influence on this. In the final picture, then, on balance, a housing subsidy remains the size of the exemption from the WOZ value of the home (box 3). This subsidy is therefore independent of the size of the mortgage debt. Because of the graduated rate in box 3, as it will apply from 2017, the housing subsidy does progressively depend on the net assets. Because the housing subsidy no longer depends on the size of the loan, the incentive to finance with borrowed capital disappears and the repayment decision is no longer disrupted by tax incentives. This is the case with the current design in box 1: in the short term (2021), house prices are 2.4% below those in the basic path. 

As a result of these lower prices, the share of households with wealth risks will be 1.6 percentage points higher in 2021 than in the base path. This effect is concentrated among the current twenties and thirties with single-family homes and is also relatively large among owner-occupiers in the Randstad.

  1. 7. Own home to box 3 without subsidy 

As with measure 6, the deduction rate will gradually decrease from 2018 to 30% in 2048. However, with this measure, the EWF rate will gradually increase to 3% in the same period. This rate roughly corresponds to the fixed return in box 3. In 2048, the tax treatment of the owner-occupied home in box 1 will be almost the same as the situation that it would fall in box 3 without exemption. At that time, the home and the associated debt will actually transfer to box 3, whereby the net assets in the home will be treated equally for tax purposes as the financial assets. Contrary to measure 6, there is, therefore, no exemption for housing wealth in this variant. The disruptive influence of the tax subsidy on homeownership is thus eliminated. Within this measure, the owner-occupied home is approached fiscally as an investment good. This is in contrast to measure 6, in which the owner-occupied home is viewed more as a consumer good. In this way, the owner-occupied home is treated in the same way as financial assets. This measure has a major impact on the housing market. To begin with, the tax subsidy rate for owner-occupiers is structurally decreasing by almost 30% compared to the original plans. For the housing market as a whole, consumption structurally falls by almost 8% as a result of the disappearance of subsidies in the owner-occupied sector. In addition, there is also a shift from the owner-occupied sector to the commercial rental sector, with the isolated effect of this measure on capital risks being 11%. More than a fifth of all homeowners would then have a potential residual debt in 2021. Especially among existing homeowners, the capital risks will increase considerably again after the introduction of this measure, in particular with the current generation in their twenties and thirties. The effect among homeowners in the Randstad is relatively large, due to the composition of the population.

  1. 8. Disciscalize your own home 

Within this measure, your own home is completely removed from the tax sphere. The value of the home is not entered in box 3 and the home acquisition debt is treated in the same way as other debts, so that the owner-occupied home is regarded as consumer property and treated in the same way as, for example, a car or a boat. From 2018, both the deduction rate and the notional rental value (box 1) will gradually decrease to 0% in thirty years. From 2048, the owner-occupied home has been de-taxed. The defiscalization of the owner-occupied home means that the average tax subsidy rate is structurally almost 7 percentage points lower than in the basic path. This means that the subsidy rate will become equal to 21% of the gross housing costs in the long term. So taxation does not mean that the subsidies disappear. Disregarding the equity on the owner-occupied home can be seen as a subsidy (in box 3). An important side effect of this measure is that the incentive to repay (extra) repayments increases sharply. The lower subsidy rate leads to lower house prices. Structurally, house prices are just under 4% lower. In the long term, total residential consumption will decrease by 2.5% compared to the basic path. In addition, approximately 4% of the total housing market shifts from the owner-occupied sector to the commercial rental market. Most measures will have a limited impact on asset risks among owner-occupiers in 2021. This is partly due to the fact that a number of measures are being gradually introduced.

When the measures are introduced over a period of thirty years, a significant part of the effect will only become apparent after 2021. There are two measures, however, that lead to a sharp increase in the share of households with a capital risk: the relocation of the home to box 3 and the defiscalization of homeownership. Calculations show that the share of households with a wealth risk increases by 1% and 4.9% respectively. For both measures, the fiscal subsidization of the house will decrease substantially. This leads to a major price shock in the short term. The magnitude of the price shock then ensures that not only existing owner-occupiers with a potential residual debt are 'underwater', but also that new owner-occupiers, despite paying off their mortgage, are underwater. The prices of owner-occupied homes adapt to new circumstances. We only see significantly lower house prices for the measures where the owner-occupied home goes to box 3 or is completely de-taxed. For all other measures, the structural effect on the price of owner-occupied homes is a maximum of 1.5% higher or lower.