By Raül Ilargi Meijer: A report published Thursday by the real estate industry in the
Netherlands states that the average home price is now 18% lower than it
was at the peak in 2008, while detached homes lost 20%-25% (March 2013
YoY prices fell 6.8%, says Eurostat). A separate, earlier, report
estimated that 20% of homes, or over 1 million, are now underwater.Today's report comes hot on the heels of a study issued Wednesday by a government commission, which took a full year to prepare and 121 pages to explain what went wrong in the Dutch housing bubble, and what should be done now to correct it.
The core problem is simple: from 1995 to 2008 home prices more than tripled (rose 200%+). Hence, if we round off to a 20% drop from peak levels, or 60% from 1995 levels when prices were a third of what they were in 2008, there's still an increase of about 150% from the starting levels that needs to be dealt with. We can discount for, and let's be generous, perhaps 50% for overall price inflation, but that still leaves us with a 100% increase, which is quite a bit more than the 60% absorbed so far.
This means that, seen from the 2008 peak perspective, a 20% price fall has been completed, and another 33% drop is needed to get back to where it came from. Some may cite reasons why prices should remain elevated, but that smacks too much of the "this time is different" argument; one might as well argue the opposite. A main point raised is that demand outstrips supply, but demand is not what people want; it's what they will be able to afford. And the Dutch economy is shrinking.
Well, you see the problem by now, of course: like many other nations, the Dutch today feel quite strongly that they have suffered enough already, and someone somehow needs to revive the housing market. But like everyone else, the Dutch wish to wish away the problem of the not yet corrected part of the pricing model. In their case, they want 200% (1995+100%) to be the new normal (a.k.a. the new black).
Not surprisingly, the government report says that A) all parties are to blame, and B) the government needs to get more involved, i.e. make sure loans become available for people who now can't get them, a.k.a. people who are not the most likely prime candidates to buy a home that's still some 33% overvalued. Though, admittedly, sucking in those last remaining suckers would prop up moribund builders, agents and lenders for a while longer. Whether that's a government's task is at the very least highly questionable (obviously, other countries, including the US, work on similar resuscitation efforts).
The most hilarious I've seen to date coming out of the Netherlands (a good second was:" build more homes"!) is the proposal for the government to artificially raise home rents so people will be more likely and tempted to buy a home. An act which, incidentally, has recently been stripped of its most flagrant artificial incentives.
Incentives like the 105%-110% mortgages offered by lenders to everyone who could fog a mirror, but more than that, the main one, a very generous mortgage interest deductibility system, which at some point had people believe they would be stealing from themselves if they didn't buy a home. The more you borrowed, the better off you were. The Dutch government stood by and did nothing (except count the extra tax revenue). And now a government committee says everyone's to blame, not just them. Incompetent inglourious lying basterds.
Throughout the western world it's been an active collaboration of the governments and the banks and the real estate industry and the builders. For private parties, it's just a nice one-off windfall (if you're the boss). But if tax rates remain the same, tripling home prices are such a windfall for any level of government that it's really worth it to encourage the madness where and whenever you can. It doesn't get more predictable than that. And neither does the follow-up: with prices, but especially sales, dropping off a cliff, tax revenue falls, and since there's nothing as addicted to anything as a government to taxes, services and benefits go out with the bathwater. But only after all lenders have been made whole (Dutch banks have mostly been nationalized) with the - largely future - tax revenues of the home buyers and their unborn progeny.
It's a very simple story really: this is a widespread tale of western societies transforming themselves into pyramid schemes; or perhaps we should say one big global Ponzi scheme. And these Ponzi things collapse, and there's nothing anyone can do to "fix" that: the poisoned chalice must and will be emptied to the last drop. Only, the politicians - legally - have their hands in everyone's pocket, so they can throw around trillions of dollars and euros to hide the process of the plunging system for as long as it lasts. That's where we're at right now.
And it's not that all of these folks have evil minds; the intelligence level of politicians in the Netherlands approaches zero as much as it does in other western countries. The issue is that the entire system has blinders on, the blinders of ever-lasting growth economic "education", and of when you have none, do what you can, sell your grandma if you must, to return to growth ASAP. A few who understand it could be labeled evil; the rest are all blinded by the lights of power. And at best completely useless when it comes to governing a society that is not growing rapidly and happily.
They can think in only one dimension, and that one-dimensional thinking can in the end lead to one end only: complete and utter disaster. It's everything on red every time and every day, and that's not how the world works. Every time black comes up is, for these people, nothing but another reason to put it all on red again next time. A surefire recipe for mayhem. But it's all they have ever learned.
Still, don't take my word for it. Christoph Schult and Anne Seith laid it out quite well in Der Spiegel last week:
"Underwater" is a good description of the crisis in a country where
large parts of the territory are below sea level. Ironically, the
Netherlands, widely viewed as a model economy, is facing the kind of
real estate crisis that has only affected the United States and Spain
until now. Banks in the Netherlands have also pumped billions upon
billions in loans into the private and commercial real estate market
since the 1990s, without ensuring that borrowers had sufficient
collateral.
Private homebuyers, for example, could easily find banks to finance
more than 100% of a property's price. "You could readily obtain a loan
for five times your annual salary," says Scheepens, "and all that
without a cent of equity." This was only possible because property
owners were able to fully deduct mortgage interest from their taxes.
Instead of paying off the loans, borrowers normally put some of the
money into an investment fund, month after month, hoping for a profit.
The money was to be used eventually to pay off the loan, at least in
part. But it quickly became customary to expect the value of a given
property to increase substantially. Many Dutch savers expected that the
resale of their homes would generate enough money to pay off the loans,
along with a healthy profit.
More than a decade ago, the Dutch central bank recognized the
dangers of this euphoria, but its warnings went unheeded. Only last year
did the new government, under conservative-liberal Prime Minister Mark
Rutte, amend the generous tax loopholes, which gradually began to expire
in January. But now it's almost too late. No nation in the euro zone is
as deeply in debt as the Netherlands, where banks have a total of about
€650 billion in mortgage loans on their books.
Consumer debt amounts to about 250% of available income. By
comparison, in 2011 even the Spaniards only reached a debt ratio of
125%.
The Netherlands is still one of the most competitive countries in
the European Union, but now that the real estate bubble has burst, it
threatens to take down the entire economy with it. Unemployment is on
the rise, consumption is down and growth has come to a standstill.
Despite tough austerity measures, this year the government in The Hague
will violate the EU deficit criterion, which forbid new borrowing of
more than 3% of gross domestic product (GDP).
It's a heavy burden, especially for Dutch Finance Minister Jeroen
Dijsselbloem, who is also the new head of the Euro Group, and now finds
himself in the unexpected role of being both a watchdog for the monetary
union and a crisis candidate.
Even €46 billion in austerity measures are apparently not enough to
remain within the EU debt limit. Although Dijsselbloem has announced
another €4.3 billion in cuts in public service and healthcare, they will
only take effect in 2014.
"Sticking the knife in even more deeply" would be "very, very
unreasonable," Social Democrat Dijsselbloem told German daily
Frankfurter Allgemeine Zeitung, in an attempt to justify the delay. It's
the kind of rhetoric normally heard from Europe's stricken southern
countries. The adverse effects of living beyond one's means have become
apparent since the financial crisis began. Many of the tightly
calculated financing models are no longer working out, and citizens can
hardly pay their debts anymore. The prices of commercial and private
real estate, which were absurdly high for a time, are sinking
dramatically. The once-booming economy is stalling.
"A vicious cycle develops in such situations," says Jörg Rocholl,
president of the European School of Management and Technology in Berlin
and a member of the council of academic advisors to the German Finance
Ministry. "Customers have too much debt and cannot service their loans.
This causes problems for the banks, which are no longer supplying enough
money to the economy. This leads to an economic downturn and high
unemployment, which makes loan repayment even more difficult."
The official unemployment rate has already climbed to 7.7%. In
reality, it is probably much higher, but that has been masked until now
by a demographic group called the ZZP. The "Zelfstandigen zonder
personeel" ("Self-employed without employees") are remotely related to
the German model of the "Ich-AG" ("Me, Inc."). About 800,000 ZZPers
currently work in the Netherlands. [..] (ED: at a working population of
maybe 10 million.)
The Dutch have long been among Europe's most diligent savers, and in
the crisis many are holding onto their money even more tightly, which
is also toxic to the economy. "One of the main problems is declining
consumption," says Johannes Hers of the Netherlands Bureau for Economic
Policy Analysis (CPB) in The Hague, the council of experts at the
Economics Ministry. His office expects a 0.5% decline in growth for
2013. Some 755 companies declared bankruptcy in February, the highest
number since records began in 1981. The banking sector is also laying
off thousands of employees at the moment.
Because of the many mortgage loans on the books, the financial
industry is extremely inflated, so much so that the total assets of all
banks are four-and-a-half times the size of economic output.
The main problem seems to be that the entire westworld economic system is based on belief alone. The Netherlands has become a society built entirely on delusion, and it's by no means the only one.
Recently, 80-year old Dutch somewhat-euro-sceptic right wing statesman Frits Bolkestein said that within 5 years, Germany, Holland et al should and would introduce a second currency besides the Euro. He was adamant France could not be part of it: "they're broke!". It seems to me, so is Holland. It must be an increasingly lonely time to be Angela Merkel.
The above made me think of a nice song by a nice name for a band: "Do you believe in the Westworld?" by The Theatre of Hate. Yup, from the Thatcher days; and please also do read this brilliant Russell Brand take on Maggie. By the way, the BBC right now debates whether it should play, in its weekend charts show, the Wizard of Oz song "Ding Dong, The Witch Is Dead", which has shot up the charts after Thatcher died.
The yellow sun was setting in tombstone
The citizens were gone, but not to their homes
By a freak a coin in the piano made it play
But only the wind and the dust heard it say
Do you believe in the Westworld?
From the south on a wind in walked a cowboy
The saloon was dry but his guns were well oiled
Somehow he remembered when he kissed his wife
And when he said goodbye
But that was before the circus with the bear arrived
Oh the bear it roared as the gun was fired
Then the cowboy turned the gun on himself as he sang
"No-one's alive"
Do you believe in the Westworld?
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