Impact Of The Financial Crisis On Real Estate In The Hague

Abstract

Following the 2001 financial crisis, the government of Netherland instituted economic policies to soften the adverse impact of the crisis on the economy. In this paper, we use loan-level data to empirically assess the impact of the currency devaluation and the economic response policies on prepayment and default patterns of residential mortgages in Netherland. On the one hand, our results reveal a significant higher prepayment rate of borrowers who are relatively wealthy or have a US$-denominated mortgage. On the other hand, we observe a significantly higher default rate of borrowers who are less wealthy or have Guilder-denominated mortgage.

Table of Contents

Abstract2

Table of Contents3

Chapter I4

Introduction4

Chapter II12

The Netherland crisis and the economic policy response12

The Netherland mortgage market15

Pre-crisis period15

The effects of the economic and financial crisis16

The surge of delinquencies17

The surge of real estate prices in Hague18

The appreciation of net financial worth19

Chapter III22

Methodology22

Data25

Variables33

Chapter IV39

Results39

General results45

Impact of the financial crisis and economic policy responses48

Impact of the crisis on the secondary market and financial institutions52

Chapter V56

Conclusions56

References59

Footnotes67

Chapter I

Introduction

The financial crisis and the housing market are interesting topics on which everybody has an opinion. The focus of the research will be on apartment prices in the Hague it will be interesting to see if there is a negative connection between the crisis and the price. Perhaps there are other macroeconomic influences that have a bigger impact. Or maybe the drawback is compensated by Dutch methods such as the “hypotheekrente aftrek” and the “starters leningen/subsidies”. Another interesting fact is that according to popular believe the bottom of the market (apartments of around 150.000 euro) didn't suffer as much from the crisis as the rest of the market. But is this actually true? These and other questions I will try to answer with interviews and a literature review.

The financial crisis that started around 2007 and still is not completely over, because of the massive effect on the world economies. Has been called the worst “financial crisis” since the Great depression back in the 1930s (Roubini, Rogoff, Behravesh, 2009). This was one of the factors to failure of key our financial institutions, a significant decrease in worldwide economic activity, substantial financial involvement incurred by governments all over the world and a massive decrease in consumer wealth, which is estimated in the trillions of U.S. dollars (Baily and Elliott, 2009). Although the financial crisis is more and more fading out to ordinary people, significant risk stays present for the economy over the period 2010-2011 (Roubini, 2009).

The research on macroeconomic influences on housing prices suggest that housing prices respond to all macroeconomic variables underconsideration. Variance decompositions show that the housing loan rate is the variable with the highest explanatory power over the variation of housing price, followed byinflation and employment, while money supply does not seem to show any substantial impact. (Baker 2008)

During the 1990's, Netherland experienced an economic boom.1 Most observers attribute the Netherland success to the currency peg, control of the inflation rate and the broad market-oriented economic reforms (e...