Hello fellow mustachians,
Apologies for this very lengthy post – when I was writing it, it felt like I had to add more and more context. You can skip the “This is too long” until the “tl;dr” if you’d like :)
“THIS IS TOO LONG”With all the mustachian knowledge here on the forum I would like to get my views on the Dutch real estate market challenged. Conventional wisdom in the Netherlands is that you should want to buy (the standard “you are throwing money away”-statement). Governmental intervention is done in such a way, that buying and living in your primary residence is promoted, unless you cannot afford to do so, in which case you can rent in a regulated part of the market and get subsidy to live there. My conundrum lies in the situation where you can afford to buy and to rent in the unregulated part of the market, as well as my calculations for buying real estate and landlording it. My view is that the Dutch real estate market is still a bubble waiting to deflate (even with -20% since 2008), and rent is not as bad as people make it seem to be. However, if I look at the monthly numbers again, it’s hard to argue against buying. I’ll break down the appropriate laws, facts and figures, and an example.
Appropriate lawsMortgage rent deductionIf you have income from work, and you own your primary residence, you can deduce the interest part of your mortgage payment from your income. This comes down to a 42 or 50% tax break on interest payments. It is offset a little by municipal taxes and a so-called ‘eigenwoningsforfait’ which says you could have rented out that house as well, and missing out on that rent signifies income that should be taxed (0.7% of the value of the house is added to your income again). Don’t ask me why we made this as difficult as it is. In order to qualify for the mortgage rent deduction, the mortgage has to be paid off using annuities at least (faster is also allowed). This deduction is currently being restricted slightly, and has already gone through a few slight restrictions before, and a big one about 2 years ago.
Regulations of rents below € 700 monthlyIf you want to rent a house below € 700,- (excluding utilities) you usually have to go to a corporation that owns these houses. These houses and rents are subsidized indirectly and as such, the corporations got a demand from the government to house people in them with a yearly income of € 34k or less. The rent is determined using a points-system, in which you get bonus points for size, age, location and so forth. The waiting lists for popular municipalities for such houses can be anywhere between 5 to 12 years, and if one is on the free market, it is not uncommon to have over a 1000 applicants for them.
Rents above € 700 are not regulatedThese are the so-called freemarket rents. Even if using the regulated point system the rent would be below the 700 euro mark, if you rent it for more, the government imposes no additional rules. Typically landlords ask that potential tenants earn 4x the rent in brute income on a monthly basis.
There is a rent-subsidy for rents below € 700 if you have a front doorYou can get a subsidy of up to € 328 per month if you rent a complete house. This means you have your own front door and do not share kitchen or toilet. A lot of students co-habitate houses here in the Netherlands and do not get this subsidy, even though renting a 20sqm/200sqft room in a popular city can easily set you back € 350,- per month.
Facts and Figures- The modal income for the Netherlands is € 33k (= ~2500 monthly) and the average household income is € 43.6k.
- Building ground costs approximately € 400 - € 500 euro per square meter (~10sqft) and building ground is zoned by the municipal governments, for which this is a main source of income.
- Appartments can range from € 100k for newish 40sqm or oldish 70sqm to € 200k for newish 100sqm. These usually have an additional service charge ranging between € 100 and € 300 per month. Of course, exceptions can be found.
- Houses can be found ranging from €140k for oldish 70-80 sqm to € 190k for the average 100sqm “rijtjeshuis”. These houses will have anywhere between 70 and 100 sqm ground underneath them.
- Prices in Amsterdam, Rotterdam, The Hague and Utrecht are about 20-40% higher than described above, where in low populated regions they can be about 20% lower.
- Rent in the € 700 to € 900 range is very hard to find.
- Housing prices exploded from 1995 to 2008, due to a few factors, but easier credit and the ability to count the 2nd income for mortgage were main factors in it. (See index below)
- The Netherlands has 7.2 million homes, 4.1 of which are privately owned primary residences, 2.2 million of which are owned by corporations for (mostly) regulated rent, and 900k of which are owned by others and are for (mostly) unregulated rent.
- More press for a law that allowed gifting up to € 100k tax free between parties injected about €5 billion into the market in 2014 only
- Due to different taxes and services, there is about a 6% cost associated with buying a house.
- About 30% of Dutch mortgages are aptly named to be ‘underwater’ in that the mortgage has a higher balance than the market worth of the house.
- Households earning between 34k and 43k annually can hardly rent in the subsidized market or in the freemarket rent.
Index of housing prices in the Netherlands with 2010 index as 100
1995 37,6
2000 71,1
2005 94,4
2006 98,3
2007 102,5
2008 105,5
2009 102
2010 100
2011 97,6
2012 91,3
2013 85,3
2014 86,6
“TL;DR”The examples below show how buying versus renting works out financially. The examples here are the ‘worst case’ you can find for renting, as it is the non-subsidized, market-go-crazy form of renting.
Example 1 of rent vs buy (relatively cheap apartment)Let me take my own apartment as an example. The apartment is ~100 sqm located at the edge of a major city, near highways and was built in 2008. Rent is € 750,- without utilities and without service costs, or € 9000 annually. If I would follow the here often mentioned 2% or even 1% rule, it should be worth about € 75k, at the max. On the free market, I would expect this apartment from 2008 to be valued around € 140k at least, meaning rent was at 0,53%. Cost to acquire would be about 150k. In 2008 I know they were on the market for € 210k (which was an absolutely insane price even back then). Regardless, considering what rules of thumb are used on this forum, it is an absolute steal to rent.
However, should I decide to buy it with a 30 year fixed mortgage at 4% the costs would be approximately as follows:
150k mortgage @ 4% = € 6000,- interest in year 1
Monthly annuity payments would come to € 716,12 or € 8593,44 annually. “Eigenwoningforfait” equals 0.7% times the worth of the house, so € 1050 in this case. Taking these, the tax benefit would be € 6000 – € 1050 = € 4950 @42% tax rate = € 2079, bringing the net costs for living to € 8593,44 - € 2079 = € 6514,44 annually or € 542,87 monthly. Of course, in that monthly payment one would also be paying down the mortgage for about € 2500 in the first year. If the price of the apartment would remain constant, this would bring the net monthly costs to about € 320,-. Taking 1% as provision for maintenance, that would up to € 436,- or € 5240,- annually.
That is almost a € 4k per year difference in favor of buying, although considering MMM standards the rent is dirt cheap.
Example 2 of rent vs buy (expensive apartment)This is another apartment that was both rented and sold. Apartment is located in the center of a major city and built in 2006. Rent was at € 1600 per month and sale price at € 469k, making rent 0,34%. The rent-price asked for these apartments was absolutely a steal. Using the same methodology as above, except in 52% bracket since something with that price is typically bought by people in the higher tax bracket.
Price to acquire – 490k, mortgage 30 years fixed @ 4%.
490k mortgage @ 4% = € 19600,- interest in year 1
Monthly annuity payments would come to € 2339,33 or € 28.071,96 annually. “Eigenwoningforfait” equals 0.7% times the worth of the house, so € 3283 in this case. Taking these, the tax benefit would be € 19600 – € 3283 = € 16317 @ 50% tax rate = € 8158.50, bringing the net costs for living to € 28071,96 - € 8158.50 = € 19913,46 annually or € 1659 monthly. Of course, in that monthly payment one would also be paying down the mortgage for about € 8500 in the first year. If the price of the apartment would remain constant, this would bring the net monthly costs to about € 950,-. Taking 1% as provision for maintenance, that would up to € 1340,- or € 16090,- annually. That would be about 3k per year cheaper to buy than to rent.
Note for apartment 2 is that you would need an income of about € 6400 monthly to be eligible to rent it, which is a very high brute-salary in the Netherlands (around 4% of households reach that threshold). These ‘rules’ which are imposed by the insurance companies and pensions funds owning those assets cause that there is basically hardly anything to rent long term that costs more than € 2500 monthly.
My conclusion – facepunch-time!Phew – that took a while. If you’re still reading, thanks :)
If I look through the forces under law and regulations, price development and the facts and figures, everything about the price of real estate in the Netherlands makes me scream bubble. I would expect, combined with the deflationary situation in the Eurozone, that the prices will deflate further.
As I haven’t taken possible appreciation or depreciation into account in the monthly numbers, depreciation can make the ones for buying more negative. In the first equation, all other things equal, the buying situation could accommodate for 2.5% depreciation yearly to have the same net costs. In the second one, the room is only 0.7% due to the strange rent that was asked for these apartments. In most calculations the room would be about 2.5%.
I hope the post wasn’t too confusing. I tried to describe the Dutch situation as well as I could. Unfortunately I probably won’t be able to stay where I live now, as my girlfriend and I are looking to live together soon, and the city I live in currently likely won’t be a viable option for her.
The place we would be moving to has a bit higher prices than described above, for both rent and real estate price. We are looking to rent in the beginning, but the huge difference in costs when I look at it from the buyers perspective made me reconsider. My current rent comes in at about 40% of my net-income, and moving to that new area, even after combining incomes, we will still probably be at around 40% of combined income going to rent. Going to one of the <€700 subsidized rent is unfortunately not a possibility for me as I earn more than that threshold per year. From a market perspective, it still looks like a disaster waiting to happen on the Dutch real estate market. It looks very unhealthy.
Can I get some opinions and advice on this?
