Nov 7 - The Dutch government's proposed austerity measures could have a
greater negative impact on house prices than on the performance of existing
mortgages, Fitch Ratings says.
Slow implementation, the focus on the highest earners and a partially offsetting
reduction in tax rates, mean we do not expect the much-anticipated reduction in
mortgage tax deductibility to have a significant effect on default rates in a
near future. The rate will fall to 38% from 52%, though phased in at just 0.5% a
year, and only the highest earners will be affected at first. The initial impact
will be small - we calculate the loss of income for an individual in the highest
tax bracket, making interest payments of EUR15,000, will be just EUR75 in year
one, gradually rising to EUR2,100 in year 28.
The proposal to link health-care premiums to personal income from 2014 would
have a greater impact, raising costs to EUR5,650 from EUR1,269 for those earning
EUR70,000 or more. However, as with the changes to mortgage tax relief, the
biggest burden would arguably fall on those best able to bear it (health-care
premiums will fall for those earning less than EUR29,000) and may also be partly
offset by the cut in the top tax rate.
In contrast, proposed cuts in unemployment benefits would - by definition - hit
borrowers who might be less able to continue making mortgage repayments. From
July 2014, unemployment benefits will be paid for a maximum of two years, down
from three currently. For the first year, the amount received will be 70% of a
claimant's last-earned income. It will then fall to the same level as the
This could lead to an increase in default rates after around three years,
although the impact may be tempered by an economic recovery between now and
implementation. We forecast real GDP increases of 0.7% and 1.5% in 2013 and 2014
respectively, versus a 0.7% contraction this year. Dutch unemployment has
remained low by European standards, and we currently expect it to peak in 2013,
Overall, however, the changes could add to the current weakness in the Dutch
housing market. Potential buyers may see them as another reason to avoid
entering the market, alongside economic uncertainty and the desire to wait until
prices have bottomed out. In our latest criteria revision in June we increased
our base case default rate to reflect a deteriorating macroeconomic situation
and possible austerity measures. The emergence of these measures, combined with
the sharper-than-expected falls in house prices over the summer, mean Fitch is
currently assessing its Dutch house price expectations and is likely to review
them in the near future (we already expect a steady house price decline into
We plan to comment in more detail on the broader potential ramifications of the
proposals on the Dutch mortgage and housing markets at a later date. It is also
a topic at our upcoming "European RMBS: Looking Beyond the Ratings" events in
Amsterdam tomorrow and London 20 November. Full details are available at
The new coalition government announced the measures last week as part of its
effort to make around EUR16bn of budget savings.
The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research:
EMEA Criteria Addendum - Netherlands - Mortgage Loss and Cash Flow Assumptions