Cutting mortgage interest deductions would significantly reduce Dutch home prices: OECD

Home prices in the Netherlands would be significantly lower if the government cut the mortgage interest deduction, according to the Organization for Economic Cooperation and Development (OECD) in its annual report on the state of the Dutch economy. The international economic organization called mortgage interest deductions one of the main causes of the high home prices and inequality in the housing market, and said it was “essential” that it be addressed.

“Generous tax incentives, including tax deductibility of mortgage interest payments, combined with low taxation of imputed rents, exemptions from capital gains taxes, state guarantees for buyers, and high loans-to-value mortgages have promoted homeownership as a favourable investment, driving up prices and widening wealth inequalities,” the OECD said in its report.

If the government cuts mortgage interest deductions, households will have less borrowing capacity, which would also reduce overbidding on homes. The OECD suggested that the Dutch government starts by limiting the mortgage interest deductions for high-income earners, following the Danish example, where the deduction depends on the value of the home.

The reduction in transfer tax and the National Mortgage Guarantee (NHG) also contribute to homeownership being an attractive investment. These regulations also “drive up demand and push home prices even higher as sellers price in these advantages in the asking price,” the OECD said.

According to the OECD, Dutch homeowners are the most subsidized in Europe. No other European country encourages homeownership so strongly. Chilean homeowners rank second on the list, and they receive less than half of the benefits Dutch homeowners receive.

The organization urged the government to urgently intervene in the mortgage interest deduction, but also cautioned that it should be reduced gradually. “As the Dutch housing market is highly regulated and complex, policy changes are challenging, as any reform will create both winners and losers. This calls for careful planning, clear communication, and strategic timing.”

The OECD noted that the housing shortage is the main cause of high home prices in the Netherlands. “Continuous efforts to increase housing supply are needed to sustainably achieve housing affordability.”