The scope of mortgage debt

Over the past ten years, an extensive social debate has taken place about the effectiveness of the housing policy. The debate has resulted in broadly shared views on possible policy reforms to improve the functioning of the housing market. This includes phasing out subsidization of homeownership, striving for competitive rents, stimulating the middle segment of the rental sector and a stronger focus of the corporate sector housing on low-income households. Preconditions are accessibility and affordability for lower incomes. When formulating policy, a distinction must be made between short-term and long-term effects. With the short term, we mean the period from 2017 to 2021. With the long term, we mean the situation in the new long-term equilibrium between supply and demand in the housing market. Due to the stock nature of houses, such a balance is only reached after several decades.

The long-term effects of measures for the housing market are expressed in terms of efficiency gains. When a measure is said to lead to an improvement in efficiency, this means that the average household in the Netherlands experiences more benefits every year if this measure were to be introduced. The profit for households ultimately comes from the fact that the disappearance of the disruptive tied subsidy on housing means that their total consumption better matches their preferences.

The social debate has led to a lot of attention to the tax treatment of the owner-occupied home. Due to the recent economic crisis, much attention has also been paid to the relationship between this tax treatment and the level of mortgage debt.

The measures that the government considers may intervene in policy terms on the level of household mortgage debt. In the basic path, which is the current policy, the asset risks decrease. The effect of these measures is that this decrease is slightly larger or slightly smaller. A number of measures focus on less strict loan standards.

1. Fixed annual payment for existing cases 

This policy measure aims to reduce the differences between new and existing cases on the housing market. Households with an owner-occupied home debt before 2013 (existing cases) will be subject to a repayment required in respect of the deductible mortgage interest from 2018, albeit at a fixed rate. This could be structured by calculating a fictitious repayment balance for each year for existing cases based on their home acquisition debt in 2018. No interest may be deducted from this part of the home acquisition debt. After thirty years, that part will then equal 100% of the original home acquisition debt. Households can choose whether they actually pay off their mortgage.

2. Annuity repayment requirement for 50% of the mortgage.

In order to give households more freedom of choice in their saving and repayment behavior, the requirement that households have to repay their mortgage completely (and at least annually) in thirty years is weakened. From 2018, at least 50% of the home acquisition debt must be repaid at least annually in thirty years. Mortgage interest may no longer be deducted for the remaining part of the mortgage debt after thirty years. A clear downside of this rule is that the rules for taxpayers are less clear, which is likely to lead to additional discussion.

3. Maximum LTV to 90%

If the owner has to contribute more money when buying the house, the chance that he will be flooded in the short-term decreases. Based on this idea, the maximum debt-market value ratio when purchasing a home will be further reduced to 90% in ten years from 2018. The reduction of the LTV limit ("loan to value") mainly affects the starters on the market for owner-occupied homes. They have to save longer and more before they can buy a home. As a result, the demand for owner-occupied homes is decreasing and the private rental sector is being used more, and this measure also leads to a lower average subsidy rate in the owner-occupied sector, because a larger part of the financing is provided with own money. Although that part is exempt from the capital gains tax, the depressing effect on net housing costs is smaller than that of the mortgage interest deduction.

4. Lowering maximum LTI by 10% 

In addition to lowering the maximum LTV ratio, a limit on the LTI ratio ("loan to income") is also an important instrument to limit excessive debt formation by households. A reduction in the LTI limit ensures that the homeowner's housing costs remain affordable in the event of a decrease in their financial capacity. The consequences of the owner-occupied housing market depend on the behavioral responses of consumers. For example, given the reduced maximum mortgage, buyers could choose to buy a smaller home.

On average, the new homeowner will have to contribute more of their own money when purchasing the home, so that the chance in which the households will be underwater is reduced. An important advantage of a limit on the LTI ratio (compared to a limit on the LTV ratio) is that an increase in house prices does not automatically lead to an increase in the maximum amount that households can borrow. A limit on the LTI ratio, therefore, appears to be a more effective instrument for limiting credit growth than cutting back the maximum LTV ratio.

In this policy variant, all maximum housing costs ratios (and therefore the maximum LTI ratios per income group) are reduced by 10%. A maximum housing cost ratio of 30% is therefore reduced to 27%. The consequences of a reduction in the LTI limit are concentrated among starters. Because they have to save longer before they can buy a home, the demand for owner-occupied homes decreases and the demand for rental homes increases. As the use of mortgage financing decreases in favor of more equity, the benefit of the mortgage interest deduction decreases. Households, on the other hand, benefit more from the exemption of their own home (box 3).

5. Maximum LTV starters to 106% 

The maximum LTV ratio for starters will be increased from 2018 to 106% in one go. Contrary to the policy for the basic path, this enables starters to fully finance the costs of the buyer when purchasing a home with debt. As this measure concerns only a small group, the effects on the housing market as a whole are minor. The most striking is a structural shift from the commercial rental sector to the owner-occupied housing sector of approximately 0.9% of the total housing market. A non-quantified effect of the measure is that it increases the possibilities for households to spread consumption over their lives. This, therefore, has a positive efficiency effect. However, there is a risk that financial stability will decrease slightly. After all, some of the households will be "underwater" for longer when a crisis in the housing market occurs that is accompanied by falling house prices.

6. Redemption deductible for underwater 

Households that are underwater may deduct from their taxable income from 2018, for a maximum period of five years, the redemptions of the part of home acquisition debt that exceeds the WOZ value of the owner-occupied home. This (temporary) measure is intended to help such households get out of the debt position. The measure will be abolished in 2023. This measure has a temporary effect, the impact on the housing market as a whole will be nothing, also in the short term. The measure does, however, yield substantial tax benefits for households that make use of this, because de facto part of their debt is, as it were, written off at the expense of the national budget.

This measure is potentially associated with relatively many (unintended) side effects. Households may be affected by the highest possible home acquisition debt, increasing the likelihood of benefiting from the tax exemption. However, these effects cannot be quantified. Another side effect is unequal treatment between homeowners with equal equity, but with a different distribution between home and financial wealth. Households that have made little repayment in the past are more likely to build up negative housing wealth and therefore benefit more from the scheme, even if they have large financial wealth. This measure also gives households an extra incentive to object to the WOZ value, so that it falls below the value of their home acquisition debt.

In short, how do all these measures work out for the homeowner? In the long term, the prices of owner-occupied homes adapt to new circumstances. We only see significantly lower house prices than in the basic path for 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.

The purchasing sector measures show a correlation between the magnitude of long-term efficiency gains and an increase in short-term capital risks. Under current policy, housing subsidies disrupt the size of housing consumption and the choice between buying and renting. The more that these subsidies are phased out, the greater the efficiency gain and the price-driving effect of subsidies on house prices decreases. At the same time, these lower house prices ceteris paribus will lead to an increase in capital risks by 2021. Conversely, an increase in subsidization, such as increasing the mortgage interest deduction to the situation before the measures of the Rutte II cabinet, will actually lead to a decrease in long-term efficiency and reduced short-term capital risks.

To be clear, these are the possible scenarios, according to government policy intentions. So it is not said that these scenarios will become reality after the 2017 elections. As a reader, it is your right to know what to expect!