The case for investing in the Dutch housing market in a historical context
Before we look specifically at the effects of rent regulation, it is important to understand why the Dutch housing market has aroused so much interest from domestic and international investors over the past decade.
First of all, pension funds (and other investors) seek stable and predictable (direct and indirect) returns, with a hedge for inflation. This basis provides certainty for the required rate of return these investors have with respect to their pensioners.
If this return is unpredictable or the risk/return profile becomes skewed, then the obvious solution is to allocate the capital to a different investment, i.e. a different type of investment product (equities or government bonds) or geographic location (in other countries).
This is the reason that investors usually gravitate - within their residential investment strategy - towards markets with the following demographic, economic and spatial characteristics:
The Netherlands has witnessed strong growth in the number of households for many years now. The total number of households has increased by 20% since 2000 (Statistics Netherlands (CBS), 2022). The growth in the number of single-person households has been particularly sharp, with an upturn of 38% in the last 20 years. This household growth is particularly noticeable in a European context, including compared to neighbouring countries such as Belgium and Germany. The number of households will grow by a further 9.7% in the years up to 2035, with single-person households again increasing sharply by 16.3% (ABF Research, 2022). In terms of demographic growth and demand for housing, this makes the Netherlands an attractive market for investing in housing.
The Dutch economy benefits from the country’s favourable geographical position in Europe, which is enhanced by its high-quality logistics and digital infrastructure. Important sectors with high export values include food production and processing, the chemical industry and manufacture of machinery. Strong trade relations, a highly-educated workforce and high-grade expertise at companies likewise contribute enormously to the Dutch economy’s competitive edge and to the large numbers of highly-skilled migrants who come to the country.
Income growth of the Dutch population
After Luxembourgers and Danes, the Dutch enjoy the highest disposable income in the European Union (Eurostat, 2022). Since 2013, the average disposable income of Dutch households has climbed by 28%, while in the same period the purchasing power of households has risen by an average of 1.5% per year.
Predictable spatial planning
The Netherlands has historically been subject to strict spatial planning rules. On top of this, since the introduction in 2012 of the Ladder for Sustainable Urbanisation, spatial plans need to be implemented in an extremely sustainable manner. The focus is on urban construction. Only if there is no room in urban areas do we look outside the red contours. This policy facilitates shortages, which means that there will be no oversupply at a regional level. Long-term vacancies on the housing market are automatically prevented as a result of this policy.
Level of regulation determines the investment climate
In addition to these demographic, economic and spatial characteristics, the structure and regulation of the housing market plays a major role in the allocation of funds and resources by investors. Substantial adjustments have been made to this structure in the last ten years. This initially led to a considerable improvement in the investment climate and strong growth in demand, especially for homes in the unregulated sector.
Until 2013, the Netherlands had almost no unregulated rental market. The housing market was largely split into two segments: owner-occupier properties and social housing. In 2013, the unregulated rental market comprised a total of 290,000 homes (CBS, IPD index), the equivalent of 4% of the total housing stock at the time. The changes implemented between 2013 and 2015 by the then Minister for Housing and Central Government Sector Stefan Blok, based on his Blok Amendment Proposal, triggered a dramatic change to the system on the housing market. This initially resulted in housing corporations (again) having to focus on their primary target group: lower-income households. Furthermore, it caused a shift in demand from households to the unregulated sector, as these people were no longer able to rent social housing. At the same time - due to excessive lending in the run-up to the financial crisis - the lending capacity for mortgages was reduced, which made the owner-occupier market less accessible to middle incomes.
These two policy changes pushed up demand for unregulated rental homes considerably: homes that were already in short supply. At the same time, the introduction of the Authorised Institutions for Social Housing Reform Act (Herzieningswet Toegelaten Instellingen Volkshuisvesting) enabled (institutional) investors to invest large sums in new rental homes in the unregulated segment. Housing corporations were again forced to concentrate on their primary task - housing lower-income households - and this created capacity for investors to build homes in the unregulated rental sector. Since 2015, about 10,000 to 15,000 new rental properties have been added to the housing stock each year using capital provided by (institutional) investors. Yet this sizeable addition to the housing stock has been too small to keep up with the sharp increase in demand, which is the main reason for rental growth over the past seven years - and in turn for the ongoing debate on affordability.
In the meantime, this debate has resulted in a great deal of local and national regulation. Take the restrictions imposed when allocating land, such as the 40-40-20 rule in Amsterdam governing a mandatory percentage of social housing and mid-market rental homes (80%). On top of this, central government policy stipulated that rents could only be raised by a maximum of 1% above the rate of inflation. Even before the new rent regulation proposal, these changes were squeezing the business case for investors. The fact that most investors and pension funds seek a predictable and stable return is incompatible with this mounting regulation. The introduction of even more regulation will cause the tide to turn at some point.