Does the average price of 441,112 euro bring the housing market to a halt?

The price of a home has increased by 9.7% in one year, the largest increase in two years. A buyer now has to pay an average of 441,112 euro for a house in the Netherlands. Is this 'figure of the week' good or bad news for the economy and the housing market? We asked macroeconomist and expert strategist Charles Kalshoven from APG.

What does the figure 441,112 mean to you?
"That many homeowners see the (excess) value of their house, and an important part of their assets, increase. This gives a sense of freedom, people feel wealthy. Additionally, people who are not building up a pension see their house as an investment for later. With rising prices, that investment grows in value. That's just how it works: rising house prices lead to more confidence in one's financial situation, causing people to spend money on renovations or consumption sooner. The relationship between house prices and consumption has also been researched by the Central Plan Bureau (CPB). What did it reveal? A 10% drop in real house prices is accompanied by an average 0.4% drop in consumption in the short term. Other research from the monetary authority for the Netherlands (DNB) confirms these findings of the CPB. DNB states that the development of the value of home ownership is a major determining factor for households' consumption and also for investments in homes. That's good for the carpenter, the installer, and the kitchen supplier. But for the economy, it's also about the number of transactions, and that figure is also developing positively. In the first five months of 2024, nearly 78,000 existing homes were purchased, 9,000 more than in the same period last year. So it's not necessarily the same as high prices, but it is a stimulus for the economy. For instance, people are more likely to move, for example, for a new job. Conversely, it's not good for the economy if the market is stuck. Then many people live in the wrong house - too far from work, for example - which among other things, hinders labor market mobility."

Should the government intervene with new tax measures, as DNB has previously proposed?
"First of all: all taxes are a form of 'price policy,' and this mainly has distribution effects. In other words, scarcity is distributed between groups. In my view, you actually need 'quantity policy.' In other words, you need to take the right measures so that more homes can be built. Moreover, as a government, you can still stimulate a few things on the demand side. For example, you can promote cohabitation and stimulate the turnover of older people who live in their own homes. If supply is inelastic, it will be reflected in prices. This results in a layering of measures that are all well-intentioned but don't help people to get a home. However, there is something to be said for moving the own home from box 1 to box 3 in our tax system. After all, with ever-rising prices and rising equity, the home becomes a form of wealth building. But I would argue for an exemption and moderate rates to ensure a smooth transition and to avoid shocks. Take the current average price of €441,112, which has increased by 10% in recent periods. That translates to over €44,000 euros. If you have to pay 30% tax on that, it's over €13,000. Not everyone just has that lying around. That is a practical objection. Also, a bit strange: if house prices fall, homeowners would get thousands of euros back from the tax authorities. But through such a measure, you do combat wealth inequality. Not unimportant for tax morale; it helps if the tax system is seen as fair. Economically, there is also something to be said for it. If you tax wealth more heavily, you need fewer distorting taxes on labor."

What danger does the enormous rise in house prices hold?
"The rise in house prices is due to lower mortgage rates - especially at the end of last year, the percentage dropped - and rising wages, which allow people to borrow more. Existing homeowners create equity, newcomers do not yet have that. So those who are entering now are getting themselves deeply into debt. For this group, if house prices fall, they lose their job, or they divorce, they immediately have a problem. For those affected, it is obviously unpleasant, but I don't see it happening on a large scale. After all, there is scarcity in the Dutch housing market and in the labor market. For the latter, this will also remain the case for a while due to aging. What could still hit the housing market is a sharply rising interest rate. But that does not seem to be the case for the time being. However, I do see a risk of a divide. Young starters with middle or low incomes are more often at risk of missing out because they need to bring more of their own money to buy a house due to rising prices. Movers, who can often sell their current home with significant equity, need less of their own money to buy their next house. Incidentally, figures from the Kadaster show that the group under 35 is becoming increasingly active in the housing market. The number of purchase transactions for this group grew by 9.4% in the first quarter of 2024 compared to the same period last year. They now also form the majority in the housing market; since 2019, their share in the number of home purchases has grown from 44% to 55%. Two-thirds of these are starters, one-third are movers. The accessibility of the home ownership market is a problem, but these figures seem to indicate that starters are increasingly seizing their opportunity."