The Netherlands house price boom is yet another form of bank bailout

by Shaun Richards
It has been a while since we have taken a look at the economic situation in what some call Holland but is more accurately called the Netherlands. On a cold snowy morning in London – those of you in colder climes are probably laughing at the media panic over the cold snap expected this week – let us open with some good news. From Statistics Netherlands.

According to the first estimate conducted by Statistics Netherlands (CBS), which is based on currently available data, gross domestic product (GDP) posted a growth rate of 0.8 percent in Q4 2017 relative to Q3 2017. Growth is mainly due to an increase in exports. With the release of data on Q4, the annual growth rate over 2017 has become available as well. Last year, GDP rose by 3.1 percent, the highest growth in ten years.

Indeed the economic growth was something of a dream ticket for economists with exports and investments to the fore.

GDP was 2.9 percent up on Q4 2016. Growth was slightly smaller than in the previous three-quarters and is mainly due to higher exports and investments.

The trade development provides food for thought to those who remember this from 2015.

In a bid to boost trade links with Europe, on the back of the ‘One Belt, One Road’ initiative, the Port of Rotterdam has established a strategic partnership with the Bank of China,  (jpvlogistics )

The idea of Rotterdam being a hub for a latter-day Silk Road is obviously good for trade prospects although in terms of GDP care is needed as there is a real danger of double-counting as we have seen in the past.

Exports of goods and services grew by 5.5 percent in 2017……….Re-exports (i.e. exports of imported products) increased slightly more rapidly than the exports of Dutch products.

If we look back for some perspective we see that the Netherlands is not one of those places that have failed to recover from the credit crunch. Compared to 2009 GDP is at 112.7 which means that if we allow for the near 4% fall in that year it is 8/9% larger than the previous peak. Although of course annual economic growth of around 1% per annum is not a triumph and reflects the Euro area crisis that followed the credit crunch.
Labour Market
The economic growth is confirmed by this and provides a positive hint for the spring.

In January 2018, almost 8.7 million people in the Netherlands were in paid employment. The employed labour force (15 to 74-year-olds) has increased by 15 thousand on average in each of the past three months.

Unemployment is falling and in this area we can call the Netherlands a Germanic style economy.

There were 380 thousand unemployed in January, equivalent to 4.2 percent of the labour force. This stood at 4.4 percent one month previously………, youth unemployment is now at a lower level than before the economic crisis; last month, it stood at 7.4 percent of the labour force against 8.5 percent in November 2008.

After the good news comes something which is both familiar and troubling.

Wages increased by 1.5 percent in 2017 versus 1.8 percent in 2016. There was less difference between the increase rates of consumer prices and wages in 2017 than in the two preceding years.

Wage growth fell last year which of course is more mud in the eye for those who persist with “output gap” style economics meaning real wages only grew by 0.1%. 2016 was much better but driven by lower inflation mostly. So no real wage growth on any scale and certainly not back to the levels of the past. One thing that stands out is real wage falls from 2010 to 14 in the era of Euro area austerity.
House Prices
There were hints of activity in this area in the GDP numbers as we note where investment was booming.

In 2017, investments were up by 6 percent. Higher investments were mainly made in residential property.

Later I noted this.

and further recovery of the housing market.

So what is the state of play?

In January 2018, prices of owner-occupied houses (excluding new constructions) were on average 8.8 percent higher than in the same month last year. The price increase was the highest in 16 years. Since June 2013, the trend has been upward.

So much higher than wage growth which was 1.5% in 2017 and inflation so let us look deeper for some perspective.

House prices are currently still 2.0 percent below the record level of August 2008 and on average 24.8 percent higher than during the price dip in June 2013.

One way of looking at this is to add something to the famous Mario Draghi line of the summer of 2012 “Whatever it takes” ( to get Dutch house prices rising again). What it means though is that house prices have soared compared to real wages who only really moved higher in 2016 due ironically to lower consumer inflation. Tell that to a first time buyer!
Wealth Effects
This view has been neatly illustrated by Bloomberg today as whilst the numbers are for Denmark we see from the data above that they apply in principle to the Netherlands as well.

Danes have another reason to be happy: they’re richer than ever before………After more than half a decade of negative interest rates, rising property values in Denmark have left the average family with net assets of 1.9 million kroner ($314,000), according to the latest report on household wealth.

Er……

The last time Denmark enjoyed a similar boom was in 2006

If we switch back to the Netherlands its central bank published some research in January as to how it thinks house price growth has boosted domestic consumption.

From 2014 onwards, house prices have been steadily climbing again. The coefficient found for the Netherlands implies that some 40% of cumulative consumption growth since 2014 (i.e. around 6%) can be attributed to the increase in real house prices.

We can take the DNB research across national boundaries as well at least to some extent.

The first group comprises the Netherlands, Sweden, Ireland, Spain, the United States and the United Kingdom, and the second group includes Italy, France, Belgium, Austria and Portugal.

In economic theory such a boost comes from a permanent boost to house prices which is not quite what we saw pre credit crunch.

Between 2000 and 2008, average real house prices went up by 24% in the Netherlands. Between 2008 and 2014, as a result of the financial crisis, they went down again by 24%.

Debt
This is an issue in the Netherlands.

 As gross domestic product (GDP) rose more sharply than debts, the debt ratio (i.e. debt as a percentage of GDP) declined, to 218.8 percent. Although this is the lowest level since 2008, it is still far above the threshold of 133 percent which has been set by the European Commission.

If we look at household debt.

After a period of decline, household debts started rising as of September 2014, in particular the level of residential mortgage debt. The latter increased from 649 billioneuros at the end of September 2014 to 669 billion euros at the end of June 2017.

There is also this bit highlighted by the DNB last October.

Almost 55% of the aggregate Dutch mortgage debt consists of interest-only and investment-based mortgage loans, which do not involve any contractual repayments during the loan term. They must still be repaid when they expire, however. Such loans could cause frictions, for example if households are forced to sell their home at the end of the loan term.

Comment
There are a litany of issues here as we see another example of procyclical monetary policy where and ECB deposit rate of -0.4% and monthly QE meet economic growth of around 3%. This means that in spite of the fact that real wages have done little house prices have soared again. The problem with the wealth effects argument highlighted above is that much if not all of it is a wealth distribution and who gave the ECB authority to do this?

Those who own homes in a good location have it made. While other people – especially people who rent their homes and people with bought homes in less favorable locations – fall behind. ( NL Times)

Those who try to be first time buyers are hit hard but a type of inflation that does not appear in the CPI numbers.
The truth is that the biggest gainers collectively are the banks. Their asset base improves with higher house prices and current business improves as we see more mortgage borrowing both individually and from the business sector. We moved from explicit bank bailouts to stealth ones as we see so many similar moves around the world. Banks do not report that in bonus statements do they? This time is different until it isn’t when it immediately metamorphoses into nobody’s fault.
 

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