Why northern Europe is so indebted
theloop.ecpr.eu
theloop.ecpr.eu
The main drivers are probably the tax policy: mortgage interest payments were fully deductible (untill the very slow phasing out reforms after the 2008 financial crisis). This sounds similar as in the US, but in the Netherlands/Europe the effect is stronger because marginal tax rates are high (>50%) and the top income tax bracket kicks in much earlier than in the US. It starts around 60k in the Netherlands, so beyond 60k more than half of every extra earned Euro goes to the state. Due to the full deductibility, the common narrative became: if you're in the top tax bracket, the state pays more than half your mortgate interest. For most working households, pensions and mortgages are the only substantial tax relieves, which predictably lead to households maxing out their pensions and mortgages.
In the Netherlands, zero-downpayment (or even negative-downpayment), interest-only mortgages are/were the norm. Before the 2008 crisis, it was very common for respectable financial advisors and banks in the Netherlands to advise households to borrow as much as they can on a 30 year mortgage, never pay down the debt and put everything in the stock market.
(Incidentally, my distaste for the bad incentives that come with the tax gimics in high public-spending regimes is one of the reasons than I, a European welfare state citizen, am probably more right leaning, cold-hearted fiscal conservative than the median young progressive American tech-forum dweller.)
Now of course if the company pays e.g. 1000 Euro per month for the loan(s), it has to charge the tenants (=me & my SO) more than that plus taxes. The question is now if the effective tax rate can be pushed down to zero% by deducing the interest. As for the companies earnings, maybe that money could be "reinvested" into the house (better WiFi), so that MIGHT just be as good as putting some money aside. Or you actually buy another house for renting out. Obviously it's a good idea to talk about this to a tax advisor. For me this is only a Gedankenexperiment ;-)
If you buy another house to rent out that might prevent this. But the other thing as well is who benefits from the houses? Because now your friend will own the house you like and vice versa. You probably cannot put in any provisions to ensure your friend will at some point get ownership of his house.
However it also reduces the incentive to reapay mortgage capital at all (is that bad?)
Currently if you have £500k in cash, you can either
1) Buy a house and pay no rent
2) Pay £1500 a month in rent
Why would you pay £1500 a month in rent (which at a marginal rate of 40% means having to earn £3,750 a month, or £45k a year, extra in income.
Effectively you get a 9% roi on that £500k by buying the house (ignoring house price inflation). Someone with £500k in cash and £50k a year is better off than someone with £0 in cash and £90k a year, despite the latter being nearly twice as valuable to the economy.
Now in a situation where £1500 a month is tax free, you'd have to earn £18k extra a year, and that roi on house ownership drops to 3.6%, and that's good. Housing should be somewhere to live, not an investment.
Of course on the flip side, the extra money available would likely push private rents and house prices up anyway. Perhaps the solution would be to ringfence the interest into some form of long term savings (either to use on buying a house, or to fund a pension).
The flip side might be true, but I think it's not as easy. I have a meeting now, so I can't go into detail (and not think about the details; ergo you might still be 100% right!). But if private buyers - those who would rent - can more easily compete with companies on buying, companies need to make renting more attractive. But maybe that effect is negligible.
I want to see this equalized - either allow humans to pay tax on profits only (i.e., they can deduct all expenses of their living), or tax a company's revenue like how a human is taxed.
Although I don't know about Germany specifically, I suspect this is exactly the position you'd be in if you followed through with this plan - the company would have to pay tax on the rent. And you wouldn't be able to get around this by reducing the rent say to zero because it's a related party so the company would likely be taxed on an imputed market rent.
60% of Australian landlords claimed a rental loss in FY17/18 and that's not an outlier. [0]
In jurisdictions where rental losses can be written off against ordinary income, landlords are happy to collect the tax benefit and just do the capital play.
[0] https://www.theguardian.com/business/grogonomics/2020/jul/21...
1) It's the opposite of progressive taxation, since the tax deduction is higher the larger your mortgage is (and there's no deduction if you don't have a mortgage).
2) It artificially inflates housing prices.
Overall, it's a shifting of cash away from those that want to enter the housing market towards those that are in it, i.e. taking from the poor and giving to the rich. The policy seems like an obviously indefensible mistake, yet no political party dears to touch it because the majority of voters are beneficiaries of it, and the topic is slightly too complicated for there to be an informed public debate about it.
Disclaimer: I don't know much about this.
This can be solved with a grandfather clause.
It doesn't have to be cancelled suddenly, it could be removed over a period of 25 years or even more. Similar to what happens with public pensions.
The argument behind this is that the current level of income/taxation can not support people on pension for more than ~12 years on average and as the life expectancy rises the retirement age must rise with it.
There is a fairly big debate happening on 'graduated pensions'. Should a bricklayer who has carried heavy loads all his life be forced to work to the same age as an academic who has spent a large amount of time behind a desk in an office?
The interest rate will go back up at some point and we would have a fairer house market without this tax deduction. It's basically a tax break for people with enough resources to buy their house. And it drives up the housing prices making it harder for first-time buyers.
This could be solved by just cancelling it. People taking advantage of this scheme:
a) had no reasonable expectation that it would be long-term, and,
b) had to be wealthy enough to initially access the scheme to benefit from it, and have since continued to benefit.
Handling any exceptional cases (which would be relatively very few) would be a lot more effective, in every sense, than continuing the scheme.
Besides, the Netherlands already has a Mortgage Guarantee Scheme which protects people with mortgages and changed circumstances.
I would certainly love to be rid of it sooner rather than later, but I do acknowledge that that's going to be disadvantageous to a lot of people, and will have to take them into account as well.
The mortgage guarantee scheme doesn't really apply here, I think: it raises the buying power of people with low incomes, but once you've bought a house, it only means that their bank gets paid if you're forced to sell it - but you'd still be forced to sell it.
I find this argument really strange.
Budgets can (and do) change and cancel categories of benefits for poor people overnight.
But benefits that accrue to wealthy people must not be changed overnight?
This is a function solely of power.
For example, whereas we need to raise the retirement age, we don't suddenly increase it with a couple of years. It is raised slowly in increments, and less for people who are closer to the retirement age and thus have had less time to plan for it.
Another important difference compared to the US is that in Sweden you are more or less the bank’s serf. In many US states the home itself is the bank’s only collateral, and the homeowner can “walk away” if its value falls below the mortgage. In Sweden the bank can take everything you own, and even extract a share of your future earnings. Also there is no (quick) personal bankruptcy, only a slow process that takes years and where you have to show that you’ve payed as much as you possibly can. This lowers the bank’s risk and brings interest rates down. In Sweden you pay about 1-2% interest on a mortgage. In Denmark I think you can even get zero rate mortgages. This in turn of course incentives borrowing, since many people just look at the monthly cost of a home.
You know banks are not in your side, with a unfixed rate that is just stupid to assume that in 30 years rates will always be low. That is why I payed 40 % of my house upfront, got a low 25 year debt with fix rate (it wasn't easy to find) negotiated now. I'm set for life, I'm paying 400 euros to the bank every month and I sleep well every night.
While in theory if rates go up you could find the bond for your house and buy it at a greatly reduced rate, thus paying much less for your house. In practice there is no individual bond for your house so you can't do this.
That’s not how it works in Denmark. Here, interest deduction come in the form of increased personal allowance (ie. the annual income bracket below which you pay no taxes), which favor high and low income earners equally. I’m surprised that isn’t also the case in The Netherlands. Are you sure it’s not?
We are pretty sure it is not, that is, the more you earn, the more you can deduct, starting with the highest brackets.
The biggest issue at the moment is the shortage of house in most parts of The Netherlands. So people max out what they can spend on a house, and certainly with low interest rate that amount to quite a lot.
As to fiscal reforms, at moment you get only a percentage of the interest you pay back, not the percentage of your highest income bracket. In addition, load need to be paid back in 30 years (linear or annuity) otherwise you don't get the tax credit.
[(edit) one addition, it is interesting that in The Netherlands, the more right wing, conservative parties want to keep this tax deduction the most, the left wing parties want to get rid of it]
Mortgage tax deduction without tax on imputed rent (as in Norway, Sweden and the US) is a subsidy to those who are rich enough to own their own homes. It is also a perverse incentive in that if you pay off your mortgage, you lose the tax benefit. So people take larger mortgages than makes sense, and invest their spare cash in risky assets rather than paying their mortgages down.
An imputed rent tax without a deduction for mortgage interest would be grossly unfair to borrowers, but does not exist anywhere as far as I know.
An imputed rent tax with a deduction lightly taxes mortgage borrowers against the benefits they receive from owning not renting. It has a bigger effect on owner occupiers without mortgages - they pay the full tax without any deduction. So it is progressive. It also levels the playing field between landlords and owner-occupiers - both are taxed on the rental value of their property and receive (roughly similar) deductions. So neither form of ownership has a built-in advantage.
(Probably the right wing parties want to remove the tax deduction because they also want to get rid of the tax on imputed rent?) As pointed out in the reply, this was a misunderstanding.
One thing they did introduce was that the imputed rent tax was limited to the interest tax deduction. To encourage people to pay off their mortgages, but that is now being rolled back.
One thing is that killing the tax deduction is likely to lower the value of houses because people cannot borrow as much without the tax deduction.
The elephant in the room in The Netherlands is not only the shortage of land to build new house but also what it costs to build a new house. You can lower prices by increasing availability, but only if the new objects are actually cheaper than what people pay now.
Building a house in The Netherlands is insanely expensive. Some of it for good reasons, a building code that has lots of requirements. A large part of The Netherlands is effectively a swamp, so foundations are also very expensive. However, contractors, etc. make quite a bit of money, but the worse part is that local governments try to make money of land. To finance the city, but also to have regular house subsidize social housing.
Nah. Two big reasons I can think of: people don't understand tax policy and wealthy people benefit (just less so in Blue states).
The first point is pretty straight forward. Lots of people talk about how things are "tax deductible" without even considering whether or not the deductions apply to them. Even if the IRS published that 85% (number made up) of people took the new standard deduction, thus used no deductions, you'd be hard-pressed to convince most people to get rid of the mortgage interest deduction. People in general (even smart ones) are just irrational when it comes to tax deductions.
Secondly, the mortgage interest deduction is still used by relatively wealthy people. A $600k mortgage generates >$16k in interest payments in the first year, even at the low rates we have today. That's easily enough to clear the standard deduction (for a single person). For married people, the hitting the SALT limit with that mortgage is enough to cross the threshold.
It’s a silly system, yes, but it’s been like this since forever and it’s slowly being phased out.
In addition to this tax deductibility, there’s also NHG which allows people to pay a one-time fee (included in the mortgage) so that a bank is guaranteed to get their money back in case you are unable to pay your debts (resulting in less risk for the bank and thus lower interest rates). Again, this pushes up mortgage prices, but lower overall risk for everybody.
A one-time fee also seems to be counter-intuitive, if you want to be more social and enable poorer people not to be further disadvantaged by being naturally in a higher risk group on top of not having the capital to pay such a fee on top. Or is there a social component in that fee?
Basically a hidden interest increase.. Overall maybe cheaper. But i dont think by much..
I'm sure DFI is keeping the insane bubble going, but I wish they would make this a priority.
Ridiculous situation that the banks exploited by offering interest only loans or even stock-mortgages where they would put your down payment in stocks in stead of paying down the mortgage.
The government slammed down hard on it all after 2008 and is also building down the interest deduction, luckily.
Even my grandfather, who bought his house for 75.000 guilder and is now 83 still has outstanding debt due to this system of interest only mortgage. He's lucky that he can sell his house at a huge profit if he wants to live in a care home, but I am sure the bank earned what he borrowed and then some over his lifetime.
Also the fact that the government is killing the NHG is infuriating, they know damn well that housing is too unaffordable for young people to qualify anymore.
The government is not killing NHG, though.
The economics around housing are usually simple, but the politics seem intractable. Increasing attractiveness of some location always leads to higher prices, which can only be relieved by increasing supply (or decreasing the local attractiveness). But there are almost always forces opposing increased building, so politicians revert to demand side policies such as loans/interest rate policies or price controls, which have many downsides that are less immediately visible.
or, perhaps it's that if a place is desirable, the prices are going to be unaffordable since space is always limited. Perhaps policies have nothing much to do with it at all.
You can go taller as well, but above about 5 floors the standard house construction isn't strong enough and so there is an additional cost to better engineering to account for.
It is disgusting, as suddenly the whole society is paying (part of) the too high interest of a few.
It gets ever worst when you realise the higher the mortgage, the more likely the richer the lender, the higher the tax deduction, the higher the amount society pays.
This is also the reason why nothing will change fast on the 'interest deduction' front.
This was because in 2013, the average term was 140 years.
https://www.thelocal.se/20160324/sweden-limits-mortgage-loan...
Whether it is financially sound is another matter. Interest rates have been low for many years, and investing has been a better choice for some time. Many pay their houses off to about 50% and then leave it there at the default mortgage, only loaning more money when something needs to be done on the house.
Yea, this is a big cause of the current 'problem'. It's not so much that people cannot pay off their mortgage in 30ish years, it's that the current financial climate heavily disincentives people from doing so.
- Maximum loan is 85% of property value (min down payment 15%) - Annual pay down 2% until at 75% of property value - Annual pay down 1% until at 50% of property value - An additional 1% annual pay down if you have borrowed more than a multiple of your annual income (either 4.5x or 5.5x, can't remember exactly)
Used to be that you just borrowed 100% and paid down nothing, kind of absurd to be honest.
In Sweden you can't 'walk away' from your mortgage like in the US for example. This means its much safer for the bank to lend money and that interest rates are very low. Swedish mortgage default rates are very low.
Because people want to live close to their jobs which in modern society is mostly in cities. It does not really matter how much empty space/forest you have around them if that means living outside of all the services/too long commute.
Here you go: https://en.wikipedia.org/wiki/Wallenberg_family
The original claim was that it does. Why does it matter that Canada sees more foreign money flowing in? The space is essentially limitless, so prices should drop to zero. Except they don't, because it's not about space. It's about living in small, pleasant regions with a good economy where others also want to live. That drives up the prices, be it Toronto or Stockholm. It doesn't matter that both countries have essentially limitless land elsewhere.
Edit: Also, the claim that Sweden is "more hermetic" is also a bit silly. You are aware of freedom of movement in the EU, right?
A parliamentary constitutional monarchy, just like Canada. And why would it matter in the first place?
> with well established old-money elite and their own currency
Canada doesn't have these things?
> staying outside of NATO
How does military alliance memberships matter when discussion house prices in two peaceful, stable democracies who are unlikely to be in defensive wars any time soon?
> I can easily travel to Sweden (not exactly now though) but not buy real estate there that easy at all.
OK. What does it matter? The approximately 500 M EU/EEA citizens can. That makes Sweden very much not "hermetic".
Land (and thus homes) is expensive near cities, but cheap elsewhere.
[1] http://www.nasdaqomxnordic.com/bonds/denmark Select expiry 2053, no deferred amortization.
However, there are places where mortgage backed assets depreciate [1]. There may be other places this is true, though I don't know enough about markets in northern Europe to say if this is an issue there.
1. https://www.rethinktokyo.com/2018/06/06/depreciate-limited-l...
When housing prices are inflated and are at risk of correcting as a whole, it can be worse than credit card debt.
And by student loans I don’t mean the same as US student loans. Education is free and the state lends you money so you can move out of your parents home when you are 18 and can become independent - https://en.m.wikipedia.org/wiki/Student_financial_aid_(Swede...
While true in absolute numbers, the amount of unsecured debt in Sweden is among the highest in Europe pr. capita and has been growing very fast for the past decade. Equally the percentage of loan payments going towards paying down loans, as opposed to servicing the interest, is decreasing[1]. There is a reason why seemingly 80% of ads you see here are either for online casinos or loan companies ;)
The number of people in Sweden defaulting on their loans (being sent to Kronofogden) is also growing at an alarming rate.
[1] fi.se/contentassets/3900398fb47e41d6a6a5d9af378a1f36/konsumtionslan2019ny20190614.pdf
People on welfare can't get a mortgage anyways. So why mortgages would go up because of welfare not only going to pensioners is altogether unexplained. Also I think lumping us in with the Nordics is very questionable. Because although we might fit with the ideal of the 'Nordic model' to a certain extent, it's just easy to leave us out when we don't fit, because we're not a Nordic country geographically or otherwise.
Interesting article btw
That's what we do in Sweden, and it seems to work well
You get a subsidy when you're younger. You can use it to educate and train yourself, and/or to experiment with different options. This creates an educated population (good) and the more entrepreneurial types can start businesses without worrying too much about bankruptcy.
But permanent studenthood is only a good thing for people with academic talent. So it makes sense to reduce subsidies for the capable as they get older, leaving hardcore welfare support for those can't cope (for various reasons).
This kind of mixed approach removes some of the inflationary pressure of full-fat UBI but provides the same social benefits.
The UK system is interesting in that you can take out student loans to pay for your education, but you only have to pay it back once you earn a certain amount. If you end up being in a low wage job all your life you never need to pay it back (and you should have probably studied something different).
Also, there is no "UK system" for education. There is an England & Wales system, a Scottish system and a Northern Irish system. They're each managed differently.
In Sweden the more you earn, the higher percentage of your wages goes to taxes, so at least here it's subsidised by the upper and middle classes more than the lower classes(under a certain wage there is no tax at all, though I can't recall the number right now)
The UK system is fine, I think subsidies are better, as poor people might feel discouraged to take on more debt, and student debt isn't really desirable for anyone. I don't think people should be in debt by default, neither do I think they should be uneducated by default.
That said in Sweden we actually have a combined system of subsidies and special student loans that very much resemble the UK system you describe.
> On the contrary, this enables poor people to go to university and stop being poor.
But that's besides the point. The point is the populace is on average better educated, leading to, on average, higher salaries.
Poverty in Sweden is ridiculously low, mostly because of this. (The welfare system helps too).
And yes we export a lot of educated people to other countries, real experts who decide to live abroad, and therefore don't pay taxes on Sweden. That's fine too, being educated shouldn't come at the cost of your freedom.
Given that the lowest 20% of incomes in denmark only pays 2,5% of the income taxes I think its hard to say they are paying for other people. (Ref https://www.berlingske.dk/privatoekonomi/se-hvem-der-betaler...)
It also makes education more easy to access as you dont have any risks in taking out loans.
And why are you assuming that its the middle class that gets most out of this?
The fact that you get free education with a stipend makes it very low risk for people from a poor background to try it out. If they had to take on dept it makes it riskier if you dont complete or dont end up with a high paying job. Its not like UK dept is forgiven if you dont get a high paying job.
Seems unfair.
Whether that actually works to useful effect, or just cleans up the NEET statistic, is up for debate.
First, it often takes multiple attempts to get into one. The most popular programs have admission rates of around 10%, but since "it defines the rest of your life", why not try at least once? Then the next year, or year after that, if you're still not in, you can try something more realistic.
Second, (my experience, 15 years ago, your mileage may vary), the whole thing is just inefficiently organized. Where I went, there was 4 six week lecture periods per year, each followed by a week or two of exams. Many courses would have mandatory coursework you can only do during the lecture periods. In the end you're left with 28 weeks of crunch time per year, and the remaining 24 weeks to just fill with whatever.
Most choose to work that almost half an year, some lucky ones actually find something from their own field, though the odds go up as you're getting more years in. Then at some point you find the job more satisfying (because it's nice to actually get paid) than completing your MSc, which you then finally scrape together before having children at 30-something (if even then; I know I didn't).
On topic: I think most people on this trajectory wouldn't settle in the NEET column anyway, at least for extended periods of time.
Anyhow, I can really say that I have a problem with finance. It's often equating people to numbers, and it's hard to de-obfuscate what is really happening. I don't dislike money as a medium, but I don't like how it seems so opaque and complex, and how it becomes difficult to understand how food/housing/clothing/transport really works at a large scale for a normal citizen.
I'm 35, I love math, and last year I learned that a 5% mortgage of 150000 euros over about 15 years would cost around 85000 euros. It feels so crazy to learn something like that so late in life.
When climate problems kick in, that's where financial complexity seems impossible for me to understand.
It indicates that the previous decade tended to have higher interest rates compared to the past few years.
The table shows 2007 vs 2017 that mortgages as a percentage of disposable income have generally went down.
IIRC there is a strong correlation with higher household debt and areas with higher housing prices relative to income. The UK government do release quite detailed statistics by region for those who are interested.
When visiting Helsinki, Finland, I was amazed to hear a house for a family of 4 can easily cost near 1M euros even when located in the suburbs outside the city.
This was even more surprising to me after hearing about average salaries and driving around the capitol area—-there was a ridiculous amount of unused land. 15-30 mins outside Helsinki and you’re basically in a forest. I assumed there must be some sort of strict restrictions on building.
Is this the case, or am I assuming too much based on my experience with SF?
And yes there are a lot of restrictions for building in the city. Overall the "housing code" is quite strict and standards are very high.
The municipalities have to zone it first, and then build basic infrastructure. Whenever they try, they get bogged down by complaints by NIMBYers who really like their forests and the flying squirrels* that live in them.
* Not joking, the environments they live in are protected. And they live almost everywhere where there are enough trees to call a forest and you care to look for them. A lot of zoning plans get cancelled because of flying squirrels.
For example, check this https://www.hitta.se/kartan!~55.67224,13.07713,16.6472242507...
Shows a suburb close to Malmö(3rd largest city in sweden), and their average salary(medelinkomst) and average debt(snittbelåning).
Move the map around to see how it differs.
http://appsso.eurostat.ec.europa.eu/nui/submitViewTableActio...
https://ec.europa.eu/eurostat/web/products-eurostat-news/-/E...
The real solution to unequality requires much more radical solutions.
This is so poorly described. 0, 50, 100... What's that number?
Should I guess "debt as % of annual household income" ?
Is it true that the debt-rate in Denmark is high, but that is debt in DKK, which is very importent. The majority of the real-estate is owned by huge pensions funds and institutions which are also danish.
As other mentioned the numbers do not seem to be normalized either.
And the prices are eye watering high for what is offered. In the main urban areas Stockholm/Helsinki/Oslo it is easy to find house blocks consisting of buildings with soviet style looks costing close to 500k USD. Weird floor planning and "dry" walls are the norm here.
One of the apartments I had did not have a window in the bedroom. How is that okay to build it that way? I don't know. Yes, there are laws against this but it does happen.
The construction, while not shoddy, does not justify the price alone and it seems construction companies are doing quite well between the pre-built structures and hiring immigrants to do some of the less qualified jobs.
If you can make a parity between salaries price of apartments/buildings in Southern Europe, Portugal/Spain/France, and in the Americas are better built than the ones here. And they come in other colors than brown or beige.
What is the issue?
It's a fire hazard. At least in Sweden (and I think Norway) building codes require that all bedrooms have a window large enough for you to fit through.
Sometimes when you are buying real estate you will see "non-conforming bedroom) which means a room that looks like a bedroom and you might use as one at your own risk as you can't get out. (This might also mean it would be a bedroom if there was a closet as well - you have to figure out what it means)