Financial instruments for the Dutch housing market
November 18, 2008 1:44 AM Subscribe
If I think the Dutch housing market will crash, how can I make money from that belief?
I've come to believe that the Dutch housing market is overvalued, and I think it's actually worse than in the US. Everyone I talk to about this disagrees. Are there any financial instruments I can buy that will make me some money if I'm right?
I've come to believe that the Dutch housing market is overvalued, and I think it's actually worse than in the US. Everyone I talk to about this disagrees. Are there any financial instruments I can buy that will make me some money if I'm right?
Even though I already have predicted a housing bubble in the Netherlands in the nineties, and the OECD agreed with me on this in 2006, the facts were denied violently both times by the Dutch government.
There are several things that make the Dutch housing market unique. One is that any house owner has to include an imputed rental income in their taxable income. Secondly, mortgage interest payments are tax-deductible, without any restrictions on the prices of the houses; or their mortgages.
The last rule really subsidizes the housing of the rich. And for some reason this very expensive tax break, that is mainly financed by heavy taxations on labour, is in no danger whatsoever to be changed. If there is one political taboo not touched by any party in power in the Netherlands it is this mortgage deduction.
It is far from me to believe in conspiracy theories, but it almost seems the Dutch government needs to be housing prices as high as they are. Even though they may be inflated, basic economical figures like the GDP are nicely lifted as well with every too expensive house sold.
There seems to be too much at stake for politicians to ever let this bubble burst.
There may be some deflation over time, but that's a different story.
Anyway, to answer your question: don't speculate on markets you do not know anything about.
posted by ijsbrand at 2:41 AM on November 18, 2008
There are several things that make the Dutch housing market unique. One is that any house owner has to include an imputed rental income in their taxable income. Secondly, mortgage interest payments are tax-deductible, without any restrictions on the prices of the houses; or their mortgages.
The last rule really subsidizes the housing of the rich. And for some reason this very expensive tax break, that is mainly financed by heavy taxations on labour, is in no danger whatsoever to be changed. If there is one political taboo not touched by any party in power in the Netherlands it is this mortgage deduction.
It is far from me to believe in conspiracy theories, but it almost seems the Dutch government needs to be housing prices as high as they are. Even though they may be inflated, basic economical figures like the GDP are nicely lifted as well with every too expensive house sold.
There seems to be too much at stake for politicians to ever let this bubble burst.
There may be some deflation over time, but that's a different story.
Anyway, to answer your question: don't speculate on markets you do not know anything about.
posted by ijsbrand at 2:41 AM on November 18, 2008
A counter point I can offer is real estate in Australia, which is similarly high, but looks like it will just stall until inflation brings prices back to something more reasonable.
A big factor in, my opinion, that the US market is dropping so severely is the ability to just walk away from an underwater mortgage.
To do the same in Australia requires filing for bankruptcy, a much more drastic and longer term consequence, so people just keep paying their mortgages if they can.
Can you default on an NL mortgage without penalties in addition to losing the house?
So, it may well be property is overvalued, but may not crash.
If you wanted to play it, perhaps look at commercial property, which is often traded on the stock market as property trusts or similar that could potentially be shorted or have put options written.
In any case, playing the downside is usually inherently risky - your downside is potentially unlimited if you call it wrong, while playing the upside only risks your stake.
posted by bystander at 3:57 AM on November 18, 2008
A big factor in, my opinion, that the US market is dropping so severely is the ability to just walk away from an underwater mortgage.
To do the same in Australia requires filing for bankruptcy, a much more drastic and longer term consequence, so people just keep paying their mortgages if they can.
Can you default on an NL mortgage without penalties in addition to losing the house?
So, it may well be property is overvalued, but may not crash.
If you wanted to play it, perhaps look at commercial property, which is often traded on the stock market as property trusts or similar that could potentially be shorted or have put options written.
In any case, playing the downside is usually inherently risky - your downside is potentially unlimited if you call it wrong, while playing the upside only risks your stake.
posted by bystander at 3:57 AM on November 18, 2008
To follow up on the risk, be aware there were plenty of people who bet the US market would crash in 2003, 2004 and 2005 who lost their shirts as prices continued to rise, even though they have now been proved right. When you are right, you can be very, very right, but when you are too early it is horrid.
posted by bystander at 4:00 AM on November 18, 2008
posted by bystander at 4:00 AM on November 18, 2008
I doubt that you are right. The number of new houses constructed is, and has been for some decades, lower that the amount of housing required for the growing population. The coming recession will likely impact construction quite a bit more than it will impact population growth, and that ads upward pressure to the prices.
Maybe property is indeed overvalued, but I doubt a crash will occur. My guess, prices will stay stagnant for a while, slowly deflating the bubble, if there is one.
posted by DreamerFi at 8:13 AM on November 18, 2008
Maybe property is indeed overvalued, but I doubt a crash will occur. My guess, prices will stay stagnant for a while, slowly deflating the bubble, if there is one.
posted by DreamerFi at 8:13 AM on November 18, 2008
Secondly, mortgage interest payments are tax-deductible, without any restrictions on the prices of the houses; or their mortgages.
The last rule really subsidizes the housing of the rich.
ijsbrand, interestingly enough, the interest-payment deduction has been used for many years in the U.S. to make homes affordable to the middle class. Not to rich people, who are assumed to benefit from other deductions. It predates the housing boom in the States, too. It might be the case that the interest-payment deduction has less upward bearing on housing prices in the Netherlands than some might think.
But in answer to the OP's question, the best--and least risky, though all real estate involves risk--way to take advantage of the Dutch boom is through buying distressed, auctioned, and foreclosed properties.
You'll need a cast-iron stomach for the problems--structural and paperwork-related--for many of these foreclosures. If you'd prefer to avoid this area, you might wait for prices to bottom out and begin rising, thereby taking advantage of lower pricing and better deals. This may be doable with REITs if you don't want to own outright.
posted by Gordion Knott at 8:55 AM on November 18, 2008
The last rule really subsidizes the housing of the rich.
ijsbrand, interestingly enough, the interest-payment deduction has been used for many years in the U.S. to make homes affordable to the middle class. Not to rich people, who are assumed to benefit from other deductions. It predates the housing boom in the States, too. It might be the case that the interest-payment deduction has less upward bearing on housing prices in the Netherlands than some might think.
But in answer to the OP's question, the best--and least risky, though all real estate involves risk--way to take advantage of the Dutch boom is through buying distressed, auctioned, and foreclosed properties.
You'll need a cast-iron stomach for the problems--structural and paperwork-related--for many of these foreclosures. If you'd prefer to avoid this area, you might wait for prices to bottom out and begin rising, thereby taking advantage of lower pricing and better deals. This may be doable with REITs if you don't want to own outright.
posted by Gordion Knott at 8:55 AM on November 18, 2008
Europeans buy housing in a different way than in other countries. They don't flip the way they do in the US, you tend to buy a family home that you live in for many years, which coupled with the high number of renters means that there isn't an enormous amount to be gained by investing in these markets.
I just moved back from the Netherlands. A colleague had her mortgage denied because she only planned to stay in the country for 5 years then sell the house she was buying. They didn't think this was long enough. Tread carefully.
posted by wingless_angel at 5:02 PM on November 18, 2008
I just moved back from the Netherlands. A colleague had her mortgage denied because she only planned to stay in the country for 5 years then sell the house she was buying. They didn't think this was long enough. Tread carefully.
posted by wingless_angel at 5:02 PM on November 18, 2008
This thread is closed to new comments.
Here in my market, I was too timid in shorting the usual suspects -- Washington Mutual (BK), Wachovia (BK), Citibank (down 80%), Lehman (BK) this passed June since I thought I was too late.
These guys were the weakest links but the celerity with which they were taken out and shot this year was amazing.
There's a great poster from the netherlands at "the housing bubble blog" . . . nhz. You'll enjoy reading his posts since he apparently really knows his stuff about the dutch real estate market and how it got to where it is now.
To answer your question, to profit on the coming collapse would require buying puts or short shares of the financial institutions that will be taking the pain for their financial sins over the past decade.
I don't know how different the European stock market is so that's the extent of the advice I can give.
posted by troy at 2:08 AM on November 18, 2008