This article is only the tip of the iceberg of bigger problems to come with financial problems at housing corporations, and as a consequence, problems for renters and homeowners.
Biggest housing corporation in trouble over interest rates
Tuesday 31 January 2012
The Netherlands' biggest housing corporation is in financial difficulty after speculating on the financial markets on interest rates, the Financieele Dagblad reports.
Rotterdam-based Vestia, which manages 89,000 homes, is several billion euros in debt and the banks are demanding extra security on their loans, the paper says, quoting corporation and home affairs ministry sources.
A spokesman for the ministry has confirmed talks are taking place with Vestia but declined to go into details, the paper said. Sources say Vestia has already had several bail-outs from a special government fund.
The problem has arisen because Vestia has invested in financial products where it currently earns less than the interest it has to pay on bank loans. The corporation has borrowed millions of euros to pay for future development products.
If the value of the derivatives rise, the shortfall will be covered, the paper points out.
Most of the money the housing corporations have accumulated was built up through earlier government subsidies and guarantees, which were paid in advance for development.
With the bad economy and low interest rates the housing corporations will have no other option than to raise rents and sell-off more rent controlled housing. Once these options are gone, there will be no other option than for the government allowing even higher rents and to step in again with bailing out and subsidising housing corporations with taxpayers money.
The current social housing system is like a lottery. Those lucky enough to have social housing win big, and those who don’t have social housing lose big. This will be even more obvious if mortgage interest deductions for home owners are scrapped, because the whole reason for interest deductions was to offset the unfair financial advantages for those in social housing.
Either way, it’s going to be a rough road for everybody once the government lets market forces come into play in what has been a heavily government controlled market, an it’s not going to be pretty. Rents will be going up for most renters and home prices will continue to go down for most home owners.
It is no wonder that the housing market is completely stagnant. Nobody trusts the government’s ability to deal with this, so nobody is buying. The government thinks we are all too stupid to understand what is going on, and think that the tax cut for property transactions from 6% to 2% is going to do something
The government knows that whatever they do it will be political suicide, and that’s why they keep talking about more budget cuts (see New cabinet cuts could total €15bn). They are hoping that scaring the population will make them more willing to make changes that they are against.
quest said : "This will be even more obvious if mortgage interest deductions for home owners are scrapped, because the whole reason for interest deductions was to offset the unfair financial advantages for those in social housing."
I thought the reason for the tax rebate on mortgages was to stimulate the building trade in the 70's. The problem I have with the HRA (hypotheek rente aftrek) is that it has been abused. It should be geared more to people on lower incomes and first time buyers.
Nope, it was about off-setting high taxes and subsidies for the construction of rental housing. I also think the HRA is not done fairly or effectively, but neither is social housing. They both need to be adjusted, but in a fair way, based on income/need, and adjusted yearly.
I thought the reason for the tax rebate on mortgages was to stimulate the building trade in the 70's. The problem I have with the HRA (hypotheek rente aftrek) is that it has been abused. It should be geared more to people on lower incomes and first time buyers.
quest said:
Nope, it was about off-setting high taxes and subsidies for the construction of rental housing.
mr.fook said : To stimulate the building trade dus...
Actually, both of you seem to be wrong; the mortgage interest deductability appars to date back to the introduction of income taxes in the Netherlands, in 1893. Housing corporations at that time did exist, but they were backed by churches or labour unions, not the state.
The housing corporations are rich, yes. Wealth they developed using government guarantees, not direct subsidies. Unlike the billions-a-year mortgage deduction, the Dutch tax payer never had to spend a penny on social housing.
The previous government looked at the net worth of the corporations, and decided that what the government giveth, it can also take away, forcing them to hand over their cash reserves. It was supposed to be spent on improving the living conditions in poor social housing areas, but, surprisingly, that very same cabinet decided to cut spending on those 'vogelaarwijken'. The money was never seen again.
As predicted, housing corporations are getting into trouble now. They were always rich in stones, and poor in cash. Now, one of them doesn't have cash on hand to maintain their position in (what sounds like) an interest future.
Despite what the newspapers like to say, 'derivatives' are not risky time bombs. Futures contracts are often used as an insurance policy, as in this case. Prudent financial policy for any large organisation. Of course, you can't insure yourself against the government helping itself to some of your money.
Until 1995 housing corporations did receive subsidies from the government. When "brutering" took place, lump sum payments were made to clear the books. Since that time, in general, they do not receive subsidies, other than for what SwampedZombie mentioned "vogelaarwijken", which never really materialized.
I agree with SwampedZombie that derivatives and government guaranteed loans are not necessarily time bombs. What is a time bomb is the effect of low interest rates on the money housing corporations had invested after the 1995 brutering. When they can not or will not sell-off some of the social housing stock, they will have no other option than raise rents. Since the government also handed over a lot of control to housing corporations, it's going to be hard for them to do much about it, other than to step in and bail them out. For anyone interested, here are some links:
http://tinyurl.com/7w5rbz8
http://tinyurl.com/6uyefhp
http://tinyurl.com/7hszze6
quest said:
Until 1995 housing corporations did receive subsidies from the government. When "brutering" took place, lump sum payments were made to clear the books.
Until that time, it was convenient for the government to have NGOs owe it money (moving the lack of funds off the books), and it was easy to siphon off excess profit. From what I've been told, the housing corporations have always been essentially solvent.
I agree with SwampedZombie that derivatives and government guaranteed loans are not necessarily time bombs. What is a time bomb is the effect of low interest rates on the money housing corporations had invested after the 1995 brutering.
When they can not or will not sell-off some of the social housing stock, they will have no other option than raise rents. Since the government also handed over a lot of control to housing corporations, it's going to be hard for them to do much about it
Actually, price of most social housing units is determined by law (the points system), and the maximum yearly increase of rental properties under the points system is completely at the discretion of the Minister of Housing. In effect, the government can force the social housing corporations' hand.
Since the corporations have been unwilling to sell off properties, this may be convenient for the current government.
I think the housing corporations have their share of problems and failures; I also think they've mostly been a source for good, because they were well-funded single points of responsibility for the living conditions in 'vulnerable' areas.
Yes, it's an unfair system, but in a country that's practically run by the building industry mafia, why do THEY need to be forced into bankruptcy?
BTW, I don’t think I was mistaken when I wrote “The reason for interest deductions was to offset the unfair financial advantages for those in social housing”. Although mortgage interest deductions, like social housing, have been around for awhile, it is not until sometime in the 1960's that there were problems, because not a lot of people owned homes before that time.
Mortgage interest deductibility was put into place to offset the tax burden on imputed free-market rent in home ownership relative to the tax burden on non-free-market rent in social housing. The problem is not that it is necessarily unfair (though the fact that larger incomes receive larger deductions is), but that it is financially untenable for the government with so many people making use of it, along with loosing tax revenue from people who are in social housing who can afford not to be.
SwampedZombie said:
Actually, both of you seem to be wrong; the mortgage interest deductability appars to date back to the introduction of income taxes in the Netherlands, in 1893. Housing corporations at that time did exist, but they were backed by churches or labour unions, not the state.
...
SwampedZombie said:
Actually, price of most social housing units is determined by law (the points system), and the maximum yearly increase of rental properties under the points system is completely at the discretion of the Minister of Housing. In effect, the government can force the social housing corporations' hand.
About the only area where the government has control is on the point system and rent increases.
In all fairness, when the current system was re-worked, I don't think anyone expected the current situation with long-term high housing prices, low interest rates, lack of lending and stagnant wages. Who would have thought that in the mid-90's?
Since the corporations have been unwilling to sell off properties, this may be convenient for the current government.
It's going to be hard to force the housing corporation to sell off houses. I don't believe the terms for that were specific enough in the "butering", hence why the government keeps trying to get them to do it, but it is basically just a "gentlemans agreement" without any real teeth.
I'm curious why you think this is going to be convenient for the current government -- do you mean because they can make the housing corporations look like the bad guys? Possibly that will work, but I'm not sure that they will have any options that are not political suicide at this point.
I think the housing corporations have their share of problems and failures; I also think they've mostly been a source for good, because they were well-funded single points of responsibility for the living conditions in 'vulnerable' areas.
I agree, that overall they were basically a source for good, but the big guys have eaten up all the little guys, and profit seems to reign supreme now.
Yes, it's an unfair system, but in a country that's practically run by the building industry mafia, why do THEY need to be forced into bankruptcy?
No, I don't think the good housing corporations should be forced into bankruptcy. Although I do believe in free-markets in that they should be able to make profits due to good business decisions and ethics, but many have also gone too far. I also hear you about the building industry. It still **** me off that whenever there is an economic hiccup they get bailed out (6% BTW) and the rest of us just have to plod along and hope it gets better.
BTW, Here is yet another OECD report Recent house price developments: the role of fundamentals that does a good job at explaining why we have the current "perfect storm" in high housing prices. It's from 2005 before the proverbial shix hit the fan, but not too far off-base.
