Phase-out of mortgage interest tax relief puts less pressure on payments than expected

• Building more homes will not lead to lower prices in the short term

• Households will likely be able to manage monthly payments even if mortgage interest tax relief is phased out

• Rental market regulation needs extra government support to maintain housing supply

Building more homes does not automatically mean prices will drop soon

The housing market is one of the key topics in the upcoming elections. While political parties agree there’s a major shortage of affordable homes, they differ on how to tackle the issue. Some want the government to take control of the housing market, while others prefer giving the market more freedom. Building homes is the way to solve the shortage in the long run, but it doesn’t necessarily mean prices will fall anytime soon. Construction costs are expected to rise, which means new homes won’t become much cheaper. Long procedures, lengthy building cycles and the nitrogen issue will also delay progress for years. These are the conclusions ABN AMRO has made in a special edition of its Housing Market Monitor published today. The bank looked into the economic impact the election programme measures will have on new housing construction, mortgage interest relief and rental market regulation.

Households seem able to keep up with monthly mortgage payments

The possible phase-out of mortgage interest tax relief is a hot topic in political debates. There are concerns that homeowners, especially first-time buyers, could face higher monthly costs. That’s why parties in favour of the relief aim for a gradual phase-out. Homeowners usually receive their mortgage interest relief refund through their annual tax return, but ABN AMRO’s calculations show that around 30 percent of households opt for monthly repayments, possibly because they rely on the relief financially. Still, ABN AMRO expects the impact of scrapping the relief to be manageable, as long as the tax benefit is phased out evenly over ten to fifteen years and salaries rise with inflation each year. The bank has calculated that most homeowners will be able to cover the higher monthly costs from their own income. However, it points out that a gradual phase-out won’t immediately lower house prices, since rising wages and inflation also push prices up.

Rental market regulation will cost more if the government wants to maintain supply

A well-regulated rental market can help prevent speculation and keep prices affordable. But given the housing shortage, ABN AMRO says further regulation will need extra financial support. That applies to social housing, but also to the rental market in general, says Mike Langen, senior housing market economist at ABN AMRO. “Because land prices and construction costs are rising, it’s impossible to build social housing in some regions without extra financial support. Also, many investors have put rental homes up for sale due to the Affordable Rent Act. That has helped first-time buyers, but has made things harder for renters. Without extra financial support, the supply of rental homes could shrink further, especially in the mid-range segment. Political decisions made now will directly affect both affordability and availability of homes, in both the rental and owner-occupied markets. The highly regulated housing market in the Netherlands makes things even more complex. Policies aimed at helping one group almost always have an impact on other segments of the housing market.”