Its Crowded on the Housing Ladder

I was able to stay with my aunt for a few months before getting the key to a student flat in Diemen. It was quite a bike ride after going out, but after two years I managed to get a room within the ring. The landlord turned out to be a sublessor, and the real landlord soon wanted to get rid of me. After two other temporary sublets, I finally secured an official student home in Amsterdam near the end of my studies.

Steps Up

Later, when I wanted to live together, we chose a rental home—first to see how it went with my partner. With two incomes, we ended up in the private rental sector. Living together went well, and just after my thirtieth birthday, we entered the Amsterdam homeownership market. Thanks in part to mortgage interest deductions, we paid roughly the same net amount as for renting, with more space and the prospect that the house would eventually be ours. With some luck and a rising income, I slowly moved up the housing ladder.

My housing career roughly matches the housing ladder described in the CPB study released yesterday about the housing market. Not all homes are equally attractive: they range from small, drafty, and far from amenities to large, luxurious, and centrally located. This whole spectrum can be seen as successive rungs of a ladder, with one household per rung. Through moves, households with the most financial means generally occupy the highest rungs. Personal preferences also play a role: recently, now married with children, I swapped busy Amsterdam for more space in the cozier Leiden.

Supply and Demand

Over the past ten years, demand for housing has risen sharply due to population growth and smaller household sizes. The construction of new homes has lagged significantly. As a result, fewer people manage to climb or even enter the housing ladder, especially those without high incomes or wealthy parents. Young people are involuntarily living with their parents longer, and demographers now also see effects on birth rates. Supporters of the “the housing theory of everything” even see the housing shortage as a threat to innovation and productivity.

Many countries face shortages, but in the Netherlands, supply reacts very slowly to demand. Several factors play a role. First, housing construction took a big hit from the financial crisis and subsequent tightening of mortgage rules, partly due to the departure of construction workers and experts from municipalities. Second, various rules aimed at protecting nature and cityscapes make it difficult to build homes where demand is highest. Third, recent policy measures intended to keep rents and housing prices affordable have made new construction less profitable. Despite the urgency around building, meeting construction targets remains challenging.

Race to the Top

Regarding household distribution across the housing market, there is room for improvement in the Netherlands. Most Dutch households receive some form of housing market support. On the ownership market, tax subsidies like mortgage interest deductions help households move up the ladder, while those eligible for social housing and allowances get support at the lower end.

Households without such support are squeezed. They struggle to enter the housing ladder or pay exorbitant rents in the only unsubsidized segment. Owner-occupiers spend on average 23% of their income on housing costs, social renters 30%, but private renters pay on average 42%. Policymakers rightly worry about these high costs, but attempts to support private renters through extra regulations can backfire, leading to a race to the top. The recent affordable rent law curbs high rents in the free segment but causes side effects like reduced rental supply, disadvantaging those without access to homeownership.

Better Distribution

The CPB studys honest advice: to help home seekers, seriously increase building and improve housing distribution. Instead of introducing new support measures, its smarter to reduce existing subsidies. Keep social housing for the truly low incomes and gradually reduce ownership subsidies. This means some current homeowners and renters will face higher net housing costs and less capital growth. Some may choose smaller homes. Lower prices and freed-up homes will directly benefit home seekers, hopefully enabling more people to find a good spot on the desired housing ladder.