The inconvenient truth about the Amsterdam housing market

The inconvenient truth about the Amsterdam housing market is that too many people CAN afford to live in Amsterdam. Increased house prices are caused by people actually paying these prices…..The market, that’s us. The Amsterdam housing market is highly regulated, with a large part of the?inventory of houses consisting of social rent. As per 2019 data, 41% of the inventory of houses in Amsterdam was social rent (from 49% in 2011) and 28% was liberalized rent. Only 31% of the inventory of houses were owner-occupied houses. There are simply way too little houses available for sale and for rent vs demand, so house prices go up.

Despite rising house prices, with mortgage rates at record lows, financing costs are still cheaper than paying liberalized rent. Now contrary to what most media and politicians suggest, buying a house does not only have advantages over renting. But many people who can get a mortgage, and/or have saved money to deploy and see a house also as a way to build equity for the long run, who are comfortable with the risk of a housing market correction, who are accepting maintenance or possible renovation costs, and who are not needing the flexibility of renting, prefer buying rather than renting.

The relation between house prices and liberalized rents is important, as rents can go up only so much as people can afford to pay, which is limited by income growth and inflation (rising cost of living due to non-housing expenses). Let’s go over a simple “mom and pop” example of a current buy to let case. A 60m2 apartment in Amsterdam for Euro 400k, with no financing (so as an alternative to buying stocks or bonds with no leverage), with Euro 1500 monthly rent, gives you 4,5% gross annual return. Take out 1% for maintenance and 1,5% in taxes and you end up with net 2% return, with full occupancy and no surprises. With financing costs the return is even less. How much upside is there in the rent? I believe limited. Yesterday most recent data confirmed that the last quarter liberalized rents in Amsterdam were 6.8% lower than last year. If rents are maxed out it means that returns for those buying a house to rent out (buy to let) is getting smaller due to rising house prices, to the extent this makes (much) less sense vs alternative investments. This then should have a dampening effect on this buy to let driver in the housing market.

The purpose of the price of any asset, in this case of housing in short supply, is to discourage demand, and stimulate supply, and in government regulated markets prices need to go to extremes to create a balance. This often leads to a boom & bust environment (though people seem to have forgotten that house prices can also decline sharply).

It is an ideological choice of the Amsterdam municipality to limit the supply of owner-occupied houses in favor of social rent. This has always been a big driver of high house prices and high liberalized rent prices relative to locations outside of Amsterdam. If the ideological choices remain the same, there won’t be a quick change in the housing market dynamic, except for the fact that over time price itself will impact the housing market as described above.

The Amsterdam municipality’s mantra has always been that without a large amount of social rent houses, Amsterdam will only be inhabited by “the rich”. Also today the municipality is claiming that there is a disruptive divide between the rich (bad people) and the poor (good people) in Amsterdam caused by the housing market. When I walk in Vondelpark and see the huge amount of people, or see packed terraces in local (non-tourist populated) neighborhoods, with all those young & diverse people, I think well, they all live here, are these all rich people, or are they all poor people suffering like politicians & media claim who use the rich vs poor divide frame for their much broader political agenda? I do not get the impression…... Most problems in current housing market are caused by economic prosperity, not by economic hardship.

The municipality’s frame of a divide in the city between the rich and the poor is not correct.?Amsterdam is thriving, even despite Covid, cycle and walk around, and you see and feel it. Young people don’t live in social houses, as there is a more than 10 years waiting list. A material amount of occupants in social houses isn’t even supposed to live there anymore due to their rise in income. And those who do have a low income and are entitled to live in a social rent house will never move out, so they may have a low income, but live cheaply in an expensive house. You can argue that in terms of housing a low income social renter in the city center is as rich as older people who bought their house in the last couple of decades, also have a low or medium income, but are now perceived rich due to value of their house. Many of them won’t cash out before their death…when a material amount of their wealth will be collected by the tax man, and not by them…

The inconvenient truth is that due to the ideological choice of the Amsterdam municipality, a large amount of houses are occupied by people with low incomes, who live in the most expensive city in the country, in some of the most expensive parts of Amsterdam. They cannot afford it, but are subsidized by the municipality, which deprives those who can afford it to buy a house in Amsterdam from doing so. A financially (in addition to other attributes) diverse Amsterdam is a very good thing, key to its attraction and success, yet you cannot ignore the consequences for the broader housing market. You cannot have a material amount of social rent housing, and a material amount of owner-occupied houses, and a material amount of cheap liberalized rent houses (also called “middle rent”). Do the math.?

Those who own a house see the value of it shooting higher, but contrary to what media or politicians suggest, they don’t benefit from this, to the contrary. Increased equity in their house does not generate income, and governments in their perpetual quest to increase tax revenue, are now seeking to also tax home equity, which would mean home owners will face a cash outflow, so increased cost of living simply because the value of their house (as residence) has gone up. Taxing people’s home equity does not solve the supply and demand imbalance in the housing market. And those who are prudent and pay off their mortgage debt, with the goal to eventually have low costs of living at their retirement age will be punished for reducing debt, as they will then be taxed on the growing equity in their house. By law all new mortgage takers in Holland now need to pay off their mortgage (in case you apply for interest deduction from income tax, the % which is decreasing yearly). That means no reduction of cost of living after 30 years of prudent behavior, but increased costs of living due to government taxations of equity which is stuck in your house. This encourages people to take on more debt, and not save or pay off their mortgage, which extremely low interest rates facilitate (you don’t need tax deduction anymore).

Our former minister of finance Onno Ruding said in 2008, “if too much debt is the problem, more debt is not the solution”, but this is an unpopular message in the entitlement age where the younger generation of house seekers also likes to speculate with leverage in joke crypto’s, meme stonks, pet rocks & bored ape NFTs.??

To calm the housing market down the key is that central banks need to start pulling away the punchbowl, and increase interest rates. Also here prudence is required as governments are highly indebted and those wishing for a housing crash need to be careful what they wish for looking at what happened in 2008. Many first time home buyers of the last couple of years are now very much exposed, and banks won’t accept their bored ape NFTs as collateral…...I believe discouraging buy to let is another solution to explore, which the market itself is already starting to take care of as I described, and this will accelerate when interest rates rise. Building houses need to take into account environmental & space constraints, and if no ideological changes are made, the process of house price rationalization will be slow despite building more houses, which is a long term endeavor anyway.???