Scrapping mortgage interest deduction won't cause significant house price drop: IMF
The potential abolition of the mortgage interest deduction in the Netherlands will likely have a price-dampening effect, but won’t cause home prices to suddenly fall sharply. This is the view of Marnix van Rij, the Dutch director of the International Monetary Fund (IMF). He stressed that the elimination of the tax benefit for homeowners must be gradual and part of a broader package of measures.
“You have to see it in the bigger picture. Of course, you also have to address the supply,” Van Rij said at the IMF’s annual meeting in Washington. According to the fund, to solve the severe housing shortage, many new homes need to be built quickly.
The global organization for financial stability has been advocating for an end to the Dutch mortgage interest deduction for years, arguing that it unnecessarily drives up home prices and disrupts the balance with the rental market. Van Rij called this a “distortion in the housing market.”
Since the start of this century, mortgage interest deductions have been reduced significantly, both in duration and amount. But there has never been a political majority in favor of abolishing the tax benefit altogether. This election, things may be different, as several parties have abolishing the mortgage interest tax credit in their election programs.
Van Rij, who previously served as State Secretary of Finance, noted that parties have different times allocated for phasing out the benefit. According to him, this makes a significant difference. “Do you abolish it from one year to the next? Nobody is proposing that. But then, of course, you’d have a huge shock effect. Or do you say: I’ll abolish it over a period of 30 years.”
Former chief economist of De Nederlandsche Bank (DNB), Job Swank, recently calculated in the economics journal ESB that an abrupt end to mortgage interest deductions for new loans could lead to a 30 percent price drop over ten years. Existing homeowners would then face a significant decline in wealth. But according to Van Rij, virtually no one in politics supports this scenario.
“I think that if you do it gradually, the effects will not be that severe,” he said. “And then the next question is: what do you do with those proceeds? Do you give them back in tax relief?” Van Rij points out that approximately €11 million will be freed up. This can be used to reduce other taxes, which can compensate homeowners for the pain in monthly payments in other ways.
