ABN AMRO: “Accelerated scale-back of homeowners’ tax relief can curb home price rise”

Press release -

The new government has chosen a “good” moment to speed up the planned cuts in mortgage interest tax relief . “With the market starting to show signs of overheating, an accelerated scale-back of mortgage-related tax facilities could curb the upward trend in home prices,” ABN AMRO Group Economics predicts. Furthermore, Group Economics expects there will be only a minor negative effect on housing costs, as mortgage interest rates are at historic lows. This might, however, change if mortgage rates trend upwards again – the Group hasn't ruled out that possibility long-term.

Philip Bokeloh, ABN AMRO economist: “We have seen record breaking numbers of housing transactions. Across popular areas, the number of homes for sale has plummeted. And because of the tight housing market conditions, prices are soaring. A faster scale-back of tax relief for homeowners could put the brakes on that trend. All in all, we believe the effect on prices will remain fairly modest, especially if the government introduces compensatory measures. Also, the significant drop in mortgage interest rates over the past few years has cushioned the effect that a tax relief squeeze will have on housing costs. Many home-owners have already capitalised on favourable market conditions and reduced their monthly interest payments. That means they also don't benefit as much from the tax deduction of interest. However, it's not impossible that interest rates will pick up again in the future. In which case those costs will rise for new buyers and home-owners whose fixed-interest term is coming to an end, while their right to tax relief has decreased.”

Deduction rate cut by 3% a year

According to media reports, the coalition agreement between Dutch political parties VVD, CDA, D66 and ChristenUnie states that the scale-back of mortgage interest tax relief will be accelerated. Starting in 2020, the tax rate that mortgage interest can be set against will be cut by an annual 3 percent. After four adjustments, in the year 2023 that will land the maximum deduction rate at 37 percent, which is the lowest marginal rate for income taxation. This is a much faster timeline than initially planned. By previous estimates, the maximum deduction rate would hit 38 percent as late as the year 2042, following annual adjustments of 0.5% each.

Higher income, higher impact

The same media reports say that home-owners will be compensated by means of lower income tax rates. And that the tax that home-owners pay on the notional rental value of their homes will also be lowered. Philip Bokeloh: “Since we're still lacking reliable information, it's too soon to determine whether those measures would outweigh the effect of the intended scale-back of mortgage interest tax relief. We also can't say with certainty which groups will feel the effects. Based on what we know now, those in higher income bands are most likely to be impacted by these measures.”

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