Europe's Core,
She Rots Some More
By Raul Ilargi
A report published Thursday by
the real estate industry in the Netherlands states that the average home price
is now 18% lower than it was at the peak in 2008, while detached homes lost
20%-25% (March 2013 YoY prices fell 6.8%, says Eurostat). A separate, earlier,
report estimated that 20% of homes, or over 1 million, are now underwater.
Today's report comes hot on
the heels of a study issued Wednesday by a government commission, which took a
full year to prepare and 121 pages to explain what went wrong in the Dutch
housing bubble, and what should be done now to correct it.
The core problem is simple:
from 1995 to 2008 home prices more than tripled (rose 200%+). Hence, if we
round off to a 20% drop from peak levels, or 60% from 1995 levels when prices
were a third of what they were in 2008, there's still an increase of about 150%
from the starting levels that needs to be dealt with. We can discount for, and
let's be generous, perhaps 50% for overall price inflation, but that still
leaves us with a 100% increase, which is quite a bit more than the 60% absorbed
so far.
This means that, seen from the
2008 peak perspective, a 20% price fall has been completed, and another 33%
drop is needed to get back to where it came from. Some may cite reasons why
prices should remain elevated, but that smacks too much of the "this time
is different" argument; one might as well argue the opposite. A main point
raised is that demand outstrips supply, but demand is not what people want;
it's what they will be able to afford. And the Dutch economy is shrinking.
Well, you see the problem by
now, of course: like many other nations, the Dutch today feel quite strongly
that they have suffered enough already, and someone somehow needs to revive the
housing market. But like everyone else, the Dutch wish to wish away the problem
of the not yet corrected part of the pricing model. In their case, they want
200% (1995+100%) to be the new normal (a.k.a. the new black).
Not surprisingly, the
government report says that A) all parties are to blame, and B) the government
needs to get more involved, i.e. make sure loans become available for people
who now can't get them, a.k.a. people who are not the most likely prime
candidates to buy a home that's still some 33% overvalued. Though, admittedly,
sucking in those last remaining suckers would prop up moribund builders, agents
and lenders for a while longer. Whether that's a government's task is at the
very least highly questionable (obviously, other countries, including the US,
work on similar resuscitation efforts).
The most hilarious I've seen
to date coming out of the Netherlands (a good second was:" build more
homes"!) is the proposal for the government to artificially raise home
rents so people will be more likely and tempted to buy a home. An act which,
incidentally, has recently been stripped of its most flagrant artificial
incentives.
Incentives like the 105%-110%
mortgages offered by lenders to everyone who could fog a mirror, but more than
that, the main one, a very generous mortgage interest deductibility system,
which at some point had people believe they would be stealing from themselves
if they didn't buy a home. The more you borrowed, the better off you were. The
Dutch government stood by and did nothing (except count the extra tax revenue).
And now a government committee says everyone's to blame, not just them.
Incompetent inglourious lying basterds.
Throughout the western world
it's been an active collaboration of the governments and the banks and the real
estate industry and the builders. For private parties, it's just a nice one-off
windfall (if you're the boss). But if tax rates remain the same, tripling home
prices are such a windfall for any level of government that it's really worth
it to encourage the madness where and whenever you can. It doesn't get more
predictable than that. And neither does the follow-up: with prices, but
especially sales, dropping off a cliff, tax revenue falls, and since there's
nothing as addicted to anything as a government to taxes, services and benefits
go out with the bathwater. But only after all lenders have been made whole
(Dutch banks have mostly been nationalized) with the - largely future - tax
revenues of the home buyers and their unborn progeny.
It's a very simple story
really: this is a widespread tale of western societies transforming
themselves into pyramid schemes; or perhaps we should say one big global
Ponzi scheme. And these Ponzi things collapse, and there's nothing anyone can
do to "fix" that: the poisoned chalice must and will be emptied to
the last drop. Only, the politicians - legally - have their hands in everyone's
pocket, so they can throw around trillions of dollars and euros to hide the
process of the plunging system for as long as it lasts. That's where we're at
right now.
And it's not that all of these
folks have evil minds; the intelligence level of politicians in the Netherlands
approaches zero as much as it does in other western countries. The issue is
that the entire system has blinders on, the blinders of ever-lasting growth
economic "education", and of when you have none, do what you can,
sell your grandma if you must, to return to growth ASAP. A few who understand
it could be labeled evil; the rest are all blinded by the lights of power. And
at best completely useless when it comes to governing a society that is not
growing rapidly and happily.
They can think in only one
dimension, and that one-dimensional thinking can in the end lead to one end
only: complete and utter disaster. It's everything on red every time and every
day, and that's not how the world works. Every time black comes up is, for
these people, nothing but another reason to put it all on red again next time.
A surefire recipe for mayhem. But it's all they have ever learned.
Still, don't take my word for
it. Christoph Schult and Anne Seith laid it out quite well in Der Spiegel last week:
"Underwater"
is a good description of the crisis in a country where large parts of the
territory are below sea level. Ironically, the Netherlands, widely viewed as a
model economy, is facing the kind of real estate crisis that has only affected
the United States and Spain until now. Banks in the Netherlands have also
pumped billions upon billions in loans into the private and commercial real
estate market since the 1990s, without ensuring that borrowers had sufficient
collateral.
Private
homebuyers, for example, could easily find banks to finance more than 100% of a
property's price. "You could readily obtain a loan for five times your
annual salary," says Scheepens, "and all that without a cent of
equity." This was only possible because property owners were able to fully
deduct mortgage interest from their taxes.
Instead of paying
off the loans, borrowers normally put some of the money into an investment
fund, month after month, hoping for a profit. The money was to be used
eventually to pay off the loan, at least in part. But it quickly became
customary to expect the value of a given property to increase substantially.
Many Dutch savers expected that the resale of their homes would generate enough
money to pay off the loans, along with a healthy profit.
More than a decade
ago, the Dutch central bank recognized the dangers of this euphoria, but its
warnings went unheeded. Only last year did the new government, under
conservative-liberal Prime Minister Mark Rutte, amend the generous tax
loopholes, which gradually began to expire in January. But now it's almost too
late. No nation in the euro zone is as deeply in debt as the Netherlands, where
banks have a total of about €650 billion in mortgage loans on their books.
Consumer debt
amounts to about 250% of available income. By comparison, in 2011 even the
Spaniards only reached a debt ratio of 125%.
The Netherlands is
still one of the most competitive countries in the European Union, but now that
the real estate bubble has burst, it threatens to take down the entire economy
with it. Unemployment is on the rise, consumption is down and growth has come
to a standstill. Despite tough austerity measures, this year the government in
The Hague will violate the EU deficit criterion, which forbid new borrowing of
more than 3% of gross domestic product (GDP).
It's a heavy
burden, especially for Dutch Finance Minister Jeroen Dijsselbloem, who is also
the new head of the Euro Group, and now finds himself in the unexpected role of
being both a watchdog for the monetary union and a crisis candidate.
Even €46 billion
in austerity measures are apparently not enough to remain within the EU debt
limit. Although Dijsselbloem has announced another €4.3 billion in cuts in
public service and healthcare, they will only take effect in 2014.
"Sticking the
knife in even more deeply" would be "very, very unreasonable,"
Social Democrat Dijsselbloem told German daily Frankfurter Allgemeine Zeitung,
in an attempt to justify the delay. It's the kind of rhetoric normally heard
from Europe's stricken southern countries. The adverse effects of living beyond
one's means have become apparent since the financial crisis began. Many of the
tightly calculated financing models are no longer working out, and citizens can
hardly pay their debts anymore. The prices of commercial and private real estate,
which were absurdly high for a time, are sinking dramatically. The once-booming
economy is stalling.
"A vicious
cycle develops in such situations," says Jörg Rocholl, president of the
European School of Management and Technology in Berlin and a member of the
council of academic advisors to the German Finance Ministry. "Customers
have too much debt and cannot service their loans. This causes problems for the
banks, which are no longer supplying enough money to the economy. This leads to
an economic downturn and high unemployment, which makes loan repayment even
more difficult."
The official
unemployment rate has already climbed to 7.7%. In reality, it is probably much
higher, but that has been masked until now by a demographic group called the
ZZP. The "Zelfstandigen zonder personeel" ("Self-employed
without employees") are remotely related to the German model of the
"Ich-AG" ("Me, Inc."). About 800,000 ZZPers currently work
in the Netherlands. [..] (ED: at a working population of maybe 10 million.)
The Dutch have
long been among Europe's most diligent savers, and in the crisis many are
holding onto their money even more tightly, which is also toxic to the economy.
"One of the main problems is declining consumption," says Johannes
Hers of the Netherlands Bureau for Economic Policy Analysis (CPB) in The Hague,
the council of experts at the Economics Ministry. His office expects a 0.5%
decline in growth for 2013. Some 755 companies declared bankruptcy in February,
the highest number since records began in 1981. The banking sector is also
laying off thousands of employees at the moment.
Because of the
many mortgage loans on the books, the financial industry is extremely inflated,
so much so that the total assets of all banks are four-and-a-half times the size
of economic output.
The main problem seems to be
that the entire westworld economic system is based on belief alone. The
Netherlands has become a society built entirely on delusion, and it's by no
means the only one.
Recently, 80-year old Dutch
somewhat-euro-sceptic right wing statesman Frits Bolkestein said that within 5
years, Germany, Holland et al should and would introduce a second currency
besides the Euro. He was adamant France could not be part of it: "they're
broke!". It seems to me, so is Holland. It must be an increasingly lonely
time to be Angela Merkel.
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