Scrap tax breaks for homeowners in fight against housing crisis: Rabobank

The government must phase out tax breaks for homeowners quickly because they increase problems in the housing market, Rabobank said in a report compiled by various housing experts, including developers, builders, corporations, municipalities, and scientists. The bank made several recommendations to the newly appointed Minister Mona Keijzer of Housing and Spatial Planning.

“The benefits of homeownership - the increase in value and living enjoyment - now remain largely untaxed, while the financing costs are deductible,” Stefan Groot and Carola de Groot of RaboResearch said in the report. “In combination with a rigid supply, this leads to high home prices and land prices.”

The bank suggests taxing homeowners' actual housing costs and benefits, for example, by gradually increasing the notional rental value. That is an amount that homeowners must add annually to their income, a kind of fictitious rental income, to pay for the living pleasure they enjoy. The notional rental value is a small percentage of the home's value, currently 0.35 percent. Rabobank proposes increasing that to approximately 1.7 percent. The proceeds can be used to reduce taxes on work and pensions.

The mortgage interest deduction should remain in place because it dampens the effect of mortgage interest rate fluctuations, the bank said. That ensures a more stable housing market. Rabobank suggests decreasing the benefit of this deduction by taxing an owned home more heavily.

The housing market experts also made recommendations to keep the housing market more stable in bad economic times. “Now new construction production completely collapsed between 2008 and 2013 as a result of the financial crisis,” Groot said. “We are still experiencing the disadvantages of this.”

Rabobank suggests letting housing corporations own land for the long term again. Currently, they have to build on land within five years, and a new law will soon extend that to ten years. But that will do little to help, RaboResearch said. “Locations where construction can happen within 10 years are already worth a lot of money and are usually owned by market parties or municipalities.”

The bank also suggests overhauling the financing of social rental housing by decoupling it from market developments, such as land prices. Instead, give developers an amount per home built. Then, they no longer have to sell some of their homes at a lower price to social tenants, causing land prices to rise in the long term. “The requirement to build a certain percentage of homes in the affordable segment works as an implicit tax on new construction,” the researchers said.

The availability of land to build on is another big problem. RaboResearch suggests giving the government more control over large-scale construction locations and giving municipalities more freedom over the locations they own. Currently, municipalities are sometimes not allowed to build in locations even if there is social support for the construction.

The experts think these recommendations will help but stressed that solving the housing crisis will take time. “Many of the possible solutions are aimed at the long term and cannot be introduced overnight.”