Netherlands Central Bank Statement

Author: | Published: 19 Oct 2018
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The economic boom in the Netherlands persists. In 2017, GDP growth reached 3.3%, the highest growth rate in 10 years. It is expected that economic growth levels off in the next years, to 1.9% in 2020, but remains above potential. As the solid economic performance continues, cyclical tensions rise to the surface. Corporate utilisation rates are high and the labour market tightens. In a growing number of sectors businesses are reporting shortages of staff and other resources. This will put a drag on economic activity, mostly through rising wages and prices.

Flaring up protectionism, culminating into a trade war between the United States versus China and the EU, poses a risk to projected economic developments. Mutually imposed additional import tariffs weigh on international trade and dampen confidence, thereby putting a drag on the world economy. An escalating trade conflict can have severe effects for the Dutch economy, given the open character of Dutch economy. On the positive side, economic growth in the Netherlands is more and more driven by domestic demand; for a substantial part a result of favourable conditions in the housing market.

The Dutch housing market is gaining firm momentum and has bounced back to the record prices seen in 2008. House prices in the major cities have already risen above their 2008 levels. A spill-over effect from the major cities is now also being observed: prices in the surrounding regions are also rising sharply. Partly owing to the current low interest rates, homes are generally still more affordable than before the crisis, but financing costs for first-time buyers in the cities have now risen to above their pre-crisis levels. Residential properties in the cities are increasingly being bought by private investors. This may contribute towards a growing private rental market, but it is also driving up prices.

Despite the sharp rise in house prices, mortgage lending growth has remained subdued to date. This is partly attributable to more redemption payments being made (either scheduled or voluntary) and buyers increasingly

using their own funds to pay a deposit on their new home. If house prices continue on their current growth path, it stands to reason that mortgage lending growth will gain momentum again and financial stability risks may increase.

Several years ago, the economic slowdown and the housing market correction were mutually reinforcing. In the same way, the economic upturn and the housing market revival are now feeding each other. This procyclicality may be accompanied by unnecessarily high economic and social costs and is related, among other things, to the fact that mortgage interest tax relief and borrowing limits in the Netherlands are generous by international standards. The scheduled accelerated phasing out of mortgage interest tax relief will have a dampening effect on procyclicality. Further reduction of the loan-to-value (LTV) limit for residential mortgage loans is desirable, as the Dutch LTV limit remains very high from an international perspective. The current scarcity on the housing market should be remedied by increasing the housing supply, especially in the middle segment of the rental market.