By Dutch MEP Michiel Hoogeveen (ECR, JA21), Vice-Chair of the European Parliament’s Committee on Economic and Monetary Affairs
In the Netherlands, almost every millennial knows someone who has no other choice than to live with his or her parents. The Dutch housing shortage has made a house unaffordable. However, to pledge to “build, build, build” is not the solution. The problems of the Dutch housing market are much more profound. They are a symptom of the systemic dysfunctioning of the Eurosystem.
The core of the Dutch housing problem is due to the policies of the European Central Bank. For more than eight years now, the ECB has been trying – in vain – to achieve a certain level of inflation, through large-scale buybacks of government bonds combined with keeping interest rates low for an extended period of time. Peter Hein van Mulligen, the chief economist of the Dutch government’s statistical office CBS, recently demonstrated that the main cause of the high house prices in the Netherlands is not so much a shortage of housing, but the persistently low interest rates:
Het tekort aan woningen is historisch gezien niet hoog. Begin 2021 waren er voor iedere 100 woningen 101,2 huishoudens. Dat is lager dan het gemiddelde van de afgelopen 20 jaar. pic.twitter.com/hGfAeyzwQm
— Peter Hein van Mulligen (@phvmulligen) May 28, 2021
Low interest rates fuel demand for housing. We can also see this in Germany, where there has been the highest increase in housing prices since 2007.
Good Morning from #Germany, where the housing boom accelerates as Germans are buying real estate fearing rising inflation & rents. Europace House Price Index has risen in tandem w/ECB balance sheet to ever new ATHs. Jumped 1.9% in June. German House Price Index is now up 8.7%YTD. pic.twitter.com/HuP93lZDCc
— Holger Zschaepitz (@Schuldensuehner) July 25, 2021
House Price Index yoy +16.3%
Consumer confidence -6
— Daniel Lacalle (@dlacalle_IA) August 23, 2021
In the European Parliament, I asked ECB President Christine Lagarde about her policy choices. Lagarde reluctantly admitted that housing bubbles have emerged in some countries and cities, but claimed that her policies were necessary to avoid an economic crisis. That’s not a proper argument, however. Unemployment is falling, while inflation continues to increase. If Lagarde cannot rule out the possibility that her easy money policies cause non-transitory high inflation, there should be restraint. Why does the ECB continue with this policy then?
Waarom gaat het fout met de #huizenmarkt? Moeten we meer #bouwenbouwenbouwen?
Of heeft het te maken met het lage rentebeleid van de @ecb om Zuid-Europa overeind te houden?
In dialoog met @Lagarde waarschuwde ik: Uw beleid creëert levensgevaarlijke zeepbellen! #JA21 #ECB pic.twitter.com/3wyfGW2NVx
— Michiel Hoogeveen (@MPHoogeveen) June 22, 2021
Good morning from Germany, where asset inflation continues to gallop. At end-Q2'21, asset prices for German households had risen by +11.7% YoY, acc to FvS. This is 2nd-highest asset inflation since start of series in 2005, mainly driven by a record increase in real estate prices. pic.twitter.com/qw8XVglplE
— Holger Zschaepitz (@Schuldensuehner) August 20, 2021
The answer to that question is obvious: in debt-laden southern Europe, government bond yields cannot be allowed to increase too much, as otherwise, refinancing government debt would be at risk. If Italy would need to pay five percent points more interest on ten-year lending instead of the current 0.667 percent, its government budget would collapse. It would bankrupt the country.
When people say Spain (lhs) & Italy (rhs) have lots of fiscal space because yields are low, that's not quite true. The only buyer of gov't debt in both places is the ECB (blue). Private investors are staying away, so aren't convinced there's lots of space. With @JonathanPingle pic.twitter.com/fxTa27gUDW
— Robin Brooks (@RobinBrooksIIF) August 15, 2021
The problem is that the ECB’s monetary policies are not independent, but aimed at keeping the Eurozone together. At any price. That Dutch savers and pensioners are being robbed of their prosperity is of secondary importance. That people of my age can no longer afford a house is secondary. It is the rigid one-size-fits-all structure of the Eurozone which is forcing the ECB to conduct unorthodox monetary policies.
It would therefore be better to opt for policies which eliminate this risk. However, the ECB does not want to address such systemic criticism. Because that would mean calling into question the foundations underpinning the Eurosystem.
According to “Dornbusch’s Law”, what is unsustainable will eventually end, even if it may take a while. This law also holds that when a market correction occurs, it may happen faster than expected. In such a scenario, the ECB would need to raise interest rates too late and too hard. The economic consequences would be incalculable.
Hallucinant interview met Isabel Schnabel van #ECB. Haar grootse uitdaging? Klimaatverandering, want 'grote gevolgen' voor prijsstabiliteit. Stijgende inflatie? Geen probleem, misschien zelfs te laag!
Geen woord over Zuid-Europese schuldenlast en gevolgen van lage rentebeleid. https://t.co/bhXsvuKSnb
— Michiel Hoogeveen (@MPHoogeveen) August 22, 2021
Of course, it is necessary to build more houses. As a result of the migration policies of the governments led by PM Mark Rutte, the Dutch population is growing, while there are also more and more one-person households, as not enough new housing was constructed during the financial crisis. However, to see it as a solution to ruthlessly build the Netherlands full of prefabricated residential towers is short-sighted. The elephant in the room is the ECB’s monetary policy. It is time for politicians to point this out and to come up with solutions, starting with enabling weaker countries to exit the Eurozone.
This article was first published in Dutch, by TPO.