It has been a taboo in politics for decades to fiddle with the mortgage interest deductibility. The first fiscal adjustments were introduced in 2001 and with the elections for the House of Representatives in sight, the political support for complete abolition seems to increase. This should ensure a cooling down of the Dutch housing market. But how likely will that be? We talked about this with Vincent Fokke, head of listed European real estate at APG.
Why was the mortgage interest deductibility ever introduced in the first place?
Fokke: “To answer that question, we have to go back to 1893, when the mortgage interest deductibility was implemented as part of the Wealth Tax Act. Because a home owner did not have to pay rent, home ownership was considered a source of income. The rental value was added to the taxable income, the so-called imputed rent. At the same time, costs incurred to earn income, such as mortgage interest, could be deducted from that income. The original goal was therefore not to encourage home ownership, but to create a logical and fair tax system.”
So, what was the reason why did the system became the subject of discussion?
“A long period followed during which the system was not up for discussion. But that changed at the end of the twentieth century. There was a massive housing shortage just after World War II. The government wanted to solve that shortage by stimulating new construction, home ownership and, especially, social housing. In the course of those years the imputed rent was decreased in stages because it was considered politically sensitive if people had to pay taxes on a fictitious income. The sixties and seventies were characterized by years of rebuilding with an enormous growth of the middle class. Home ownership among middle incomes significantly increased in those years as well as the popularity of the mortgage interest deductibility. The combination of lowering the imputed rent and the increasing popularity of the interest deductibility has led to a growing budgetary impact for the government.”
And that is what put pressure on the system?
“Yes, indeed, the budgetary challenge for the government more and more became an urgent issue, causing increasing discussions in the nineties about the mortgage interest deductibility. But, politically speaking, it was still a very sensitive subject and it took until 2001 to implement fiscal adjustments. The maximum period, for example, for the deductibility of the mortgage interest was reduced to thirty years. In 2013, it was incorporated in the law that only interest on annuity or linear mortgages is still deductible and that interest-only mortgages lose its tax benefits. And the deduction percentage is gradually scaled back from 53 percent to 37.48 percent between 2015 and 2025. The mortgage interest deductibility has therefore already been considerably altered in the past decades to make the system more manageable and fairer.”
And what if the mortgage interest deductibility is abolished altogether, will that lead to a cooling down of the housing market?
“That is certainly not guaranteed, but a complete abolition could lead to a cooling down of the Dutch housing market. This is because buyers are able to borrow less without the tax deduction, what in turn lowers their bid margin and slows down the housing demand. However, for various reasons, the extent of the possible cooling down and the speed at which that occurs, depend on how that abolition is implemented. Phasing out the system can mitigate the impact. All previous austerity measures of the system between 2001 and 2025 have not led to a significant cooling of the housing market. Moreover, it is likely that a complete abolition of the mortgage interest deductibility will lead to compensation, for example by lowering the income tax. And finally, the structural housing shortages will continue to exert upward pressure on the prices. Although it is true that buyers are able to borrow less without the tax deduction, it all depends on the region and the segment of the market whether this leads to a cooling down. The housing market as a whole does not exist. There is a different supply and demand ratio for a single-family home in a shrinking region such as Zeeland or Groningen than for an apartment in Amsterdam. That latter region will still have a much higher demand than supply, also when the mortgage interest deductibility is abolished.”
Does that mean the system does not have to be abolished to cool down the housing market?
“If that is the only goal, there is no need to do so. However, that does not alter the fact that there are other arguments in favor of abolition. De Nederlandsche Bank and the IMF, for example, claim that the abolition leads to market disruption because it stimulates excessive debt financing and an artificial inflation of the prices of housing. Complete abolition generates 8 to 11 billion euros in revenue for the government, money that can be spent on housing construction, infrastructure or tax reduction. Furthermore, the execution and monitoring of the maximum deductible period of thirty years are extremely complicated for the tax authorities. Finally, it is also argued that home owners benefit from the mortgage interest deductibility, while tenants do not. That is true in itself, but people often forget that the social rental sector also has forms of subsidy by means of regulated rents – below the market price – and secured loans. On top of that, tenants in the social segment often also receive housing benefit.
Complete abolition of the interest deductibility does not need to be a sensitive matter, as long as it is gradually reduced and balanced compensation is implemented in return. To prevent households with high mortgage payments from getting into trouble or the gap between first-time buyers and home ownership from widening even further. Politicians should consider a complete reform of all implicit housing market subsidies, where ‘brick and mortar’ do not need to be used as an instrument to achieve the desired levelling of income.”