Cities of debt : how post-financial crisis state interventions are affecting the nexus between housing and finance in Vancouver and Amsterdam

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Cities of Debt

How post-financial crisis state interventions are

affecting the nexus between housing and finance in

Vancouver and Amsterdam

Dolly Loomans, June 2019 Research Master Urban Studies

University of Amsterdam, Graduate School of Social Sciences Thesis supervisor: Prof. Dr. M. Kaika

Second reader: Prof. Dr. T. Tasan-Kok

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Acknowledgements

This thesis would not have been possible without all the support from friends, peers and the academic staff of the University of Amsterdam. There are however, two people that I would like to thank individually for the invaluable help that they have given to me. Maria Kaika, my supervisor, who went beyond to help me with all my academic (and non-academic) struggles. I am more than grateful for all the time and energy you patiently invested in me and my thesis. Working together with you has been very inspiring and taught me so many things.

I also want to thank my dear friend Rosa, who has first of all, proofread this thesis and many other works during my studies, but even more important, has given me endless emotional support and encouragement. I am very thankful for the friendship we have developed over the years!

Finally, I want to thank all the people that made time for an interview. The conversations about mortgages and investment products were interesting and surprisingly amusing at times, and brought me to places I would have otherwise never entered.

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Overview Tables and Figures

Table 1. Comparative overview of the two cases ... 15

Table 2. Overview of the respondents in Vancouver and Amsterdam ... 17

Table 3. Most prevalent mortgage contracts in the Netherlands and their characteristics ... 33

Table 4. House prices in Vancouver, 2009-2018 ... 43

Table 5. Time line of mortgage rules changes in Canada ... 46

Table 6.Time line of mortgage rule changes in the Netherlands ... 55

Table 7. House prices after the crisis, Vancouver and Amsterdam 2009-2018 ... 58

Table 8. Comparison mortgage rule changes ... 59

Figure 1. Homeownership rates, Canada and Vancouver 1971-2006 ... 23

Figure 2. Tenure composition of the occupied housing stock, Vancouver 1991-2006 ... 25

Figure 3. Residential mortgage debt to GDP, Canada 1970-2006 ... 28

Figure 4. Tenure composition of housing stock, Amsterdam 1992-2007 ... 30

Figure 5. Mortgage debt to GDP, Netherlands 1989-2007 ... 34

Figure 6. Tenure composition, Vancouver and Amsterdam 1991 and 2007 ... 36

Figure 7. Mortgage debt before the Financial Crisis, Canada and the Netherlands 1989-2007 . 37 Figure 8. Yearly issuance of Canadian Mortgage Bonds (CMB) in billion dollars, Canada 2002-2017 ... 41

Figure 9. Outstanding balance of the public securitization programs, Canada 2005-2017 ... 41

Figure 10. Mortgage debt to GDP, Canada 2000-2017 ... 42

Figure 11. Percentage affordable house sales, Vancouver 2012-2017 ... 44

Figure 12. Mortgage debt to GDP, Netherlands 1989-2018 ... 50

Figure 13. Collective outstanding residential mortgage debt, The Netherlands 2008-2018 ... 51

Figure 14. Average house prices, Amsterdam and the Netherlands 1995-2018 ... 51 Figure 15. Mortgage debt during and after the crisis, Canada and The Netherlands 2006-2017 57

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1. Introduction

Neither a borrower nor a lender be For loan oft loses both itself and friend

Shakespeare, Hamlet, Act 1: scene 3

In 2007, the financial system shook to its foundations due to a global finance and housing crisis. Vibrations were felt worldwide, exposing the vulnerabilities of a globalized debt-infused economy. Extensive public and academic attention has been paid to the relation between housing and finance in the unfolding of the crisis (Aalbers, 2008b; Aalbers et al., 2011; Wainwright, 2009; Walks, 2014). Detailed empirical analyses on the post-crisis nexus between housing and finance are, however, still rare. In this thesis I seek to expand the understanding of post-crisis housing landscapes, by exploring the role of the state in restoring the relation between real estate and global finance. Through the presentation of a comparative case study of Vancouver and Amsterdam, mortgage debt is brought to the foreground of such an analysis.

The housing markets of both cities have experienced a remarkable post-crisis recovery, resulting in spiking house prices and extreme affordability challenges. Vancouver recently received the infamous second place of least affordable cities in the world, while Amsterdam’s owner-occupied sector is now the most expensive of Europe (Demographia, 2019; Moody's Investors Service, 2019). The cities, at the same time, lay in countries characterized by the highest levels of mortgage debt in the world. In 2018 the rate of residential mortgage debt to GDP rose over 91 percent in the Netherlands, and over 67 percent in Canada (CBS, 2019; StatCan, 2019; World Bank, 2019: calculated by author).

Both national governments took severe measures to mitigate the effects of the Global Financial Crisis, and subsequently reformed their mortgage sectors. In this thesis I argue that these state-interventions have not resulted in delinking housing from the (global) economy. By foregrounding quantitative and qualitative data, I show how the responses to the Financial Crisis have only contributed to the attractiveness of real estate and mortgages as a worldwide investment product, while making it harder for households to access housing. This pushes households out of the city, or into expensive and risky borrow practices.

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1.1 Research questions and structure of the thesis

In order to expand the understanding of post-crisis housing landscapes, the following main question leads this research:

‘How did the state interventions, consequential to the Global Financial Crisis, affect the nexus between housing and finance, in respectively Vancouver and Amsterdam?’

To answer the research question mentioned above, the following three sub-questions have been formulated:

1. What are the respective local and national, pre-crisis developments that have established the nexus between housing and finance in Vancouver and Amsterdam?

2. What are the key state interventions, related to the mortgage market, in response to the Global Financial Crisis, in respectively Vancouver and Amsterdam?

3. How did the state interventions, consequential to the Global Financial Crisis, affect mortgage borrowing and lending practices in respectively Vancouver and Amsterdam?

The first sub-question examines the pre-crisis developments that have created a strong relation between housing and finance in the first place. This sub-question is more descriptive in nature, but essential to achieve an understanding of the post-crisis nexus. Thereafter the second sub-question explores the key state interventions taken consequential to the Global Financial Crisis. The focus will, be, as is the case throughout the whole research, on mortgage related regulations. Lastly, I aim to unpack the consequences of these interventions on borrowing practices (household side) and lending practices (mortgage lending institution side) with the third sub-question.

This thesis is structured as follows; Chapter Two will introduce the theoretical pillars on which this research builds. It will discuss concepts and theories on the relation between real estate and the economy. Chapter Three will present the methodological strategy employed in both cases, addressing questions on comparing cases, gathering and analyzing data and data limitations. In Chapter Four, Five and Six, the empirical findings will be presented. Each chapter will first discuss the case of Vancouver, followed by the case of Amsterdam and a comparing conclusion. Finally, Chapter Seven, will synthesize the most important conclusions of this thesis.

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2. Theoretical Framework: Housing, Debt and Finance

In this theoretical framework I bring together work on financialization of housing and mortgages (Aalbers, 2008a; Engelen, 2008; Epstein, 2005; García‐Lamarca & Kaika, 2016; Ronald, 2008), housing affordability issues (Ryan-Collins et al., 2017; Wetzstein, 2017) and post-financial crisis housing landscapes (Forrest & Hirayama, 2015). Together with pivotal work on the relation between the built environment and capitalist accumulation processes by David Harvey (1978; 2006), these sources discuss how strong ties between housing and finance are constructed, making debt and housing central components of contemporary accumulation regimes. The presented theoretical framework will serve as the main lens for the investigation of the effects of state responses, consequential to the Financial Crisis, on the nexus between housing and finance.

2.1 Urban housing affordability crisis and the financialization of housing

Urban areas around the globe are faced with rapidly increasing house prices. Cities such as Los Angeles (Lee, 2016), Melbourne, Sydney (Birrell & McCloskey, 2016), London (Edwards, 2016), and Hong Kong (Huang, 2015) are struggling with severe affordability issues, as income levels are not growing at the same pace. According to Wetzstein (2017) a ‘Global Urban Housing Affordability Crisis’ is currently unfolding. The lack of affordable housing can have far reaching consequences, as it affects for example mental health, job prospects and family relations (Shelter, 2010). On an urban scale, increasing house prices can lead to gentrification processes and the suburbanization of poverty (Hochstenbach & Musterd, 2018; Randolph & Tice, 2014). It furthermore reproduces social inequalities between those that own property, and those that do not (Piketty, 2015).

Mainstream economics explain the vast growth of house prices through the mechanisms of supply and demand. According to this stand, house prices are high because there simply is not enough supply, and building more would thus solve the problem. However, scholars such as Ryan-Collins et al. (2017) and Tsatsaronis and Zhu (2004) argue that there is more to it. One of the factors they point to is the availability of credit. Through supplying loans, financial institutions add new money to the economy, which can have serious ramifications for economic markets (McLeay et al., 2014). According to Ryan-Collins et al. (2017) the sheer increase in house prices has only been possible due to the elastic supply of credit. Despite the multiple factors that influence house prices – such as population and income dynamics – the increased availability of credit creates a house price-credit feedback loop (as an increase in prices requires an increase in mortgage credit, which again inflates house prices). Lending

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mortgage credit is an attractive business model for financial institutions, as they are typically relatively large loans secured by real estate (meaning that, in contrast with a business or consumer loan, not all the money is lost in the case of default). In the twentieth century, mortgage lending has become one of the core activities of the banking sector in most advanced economies as they reoriented from lending to businesses, towards lending to households (Bezemer et al., 2016). This has led to an excessive growth of household debt to GDP over the last century (Jordà et al., 2016). Correlations between the increased availability of mortgage credit and rising house prices have been found in many advanced and emerging economies (IMF, 2011), such as Australia (Muellbauer & Williams, 2011), the UK (Ryan-Collins et al., 2017), Ireland (Fitzpatrick & McQuinn, 2007) and the US (Favilukis et al., 2012).

The growth of debt on the balance sheets of financial institutions and households has been accelerated by what is referred to as the financialization of housing (Aalbers, 2008). Financialization refers to the process by which profit is increasingly made without actual production; i.e. by solely trading financial, immaterial, assets (Aalbers, 2008; Engelen, 2008; Epstein, 2005; Krippner, 2005). Mortgage loans, and the homes and households behind them, have been subject to this new regime of financialized accumulation. This means that mortgage markets have shifted from a merely

facilitating market, towards a market in its own (Aalbers, 2008). Through deregulation,

standardization and the internationalization of finance, mortgage products became highly valued investment goods, yielding profits on the global capital market (Aalbers, 2008). As securities (packaged mortgage portfolios) and covered bonds, mortgages are now a source of liquidity that financial institutions can use to ‘recycle debt’ and fund new loans, providing more input for the house price-debt feedback cycle.

On a more abstract level, the process of financialization has facilitated the switching of capital from the primary circuit (production and manufacturing) towards the secondary circuit (the built environment and consumption) (Aalbers, 2008a). Drawing upon Marx’s notions of capital circuits, Harvey (2006) describes how capital switching from one circuit to another is used as a temporary solution to over-accumulation, postponing financial crises caused by the devaluation of capital. Investment in property is, therefore, according to Harvey, foremost a strategy to secure a rate of return on otherwise devaluating capital, tying the built environment into global cycles of (dis)investment. This process has transformed mortgage contracts into opaque impersonal products, and housing into an investment strategy of a global economy, making mortgage holding households part of a system “that seeks out surplus value in order to produce more surplus value, that then

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requires profitable absorption (…) with disastrous social, political and environmental consequences” (ibid.: xxvi). Financial products such as mortgages and other consumer loans, can then be seen as indirect means for accumulation by dispossession, what Marx has termed “capital’s secondary mode of exploitation” of workers (Marx, 1894 in: Elster, 1985: 184).

Housing and debt related products have thus not only been an object of financialization over the past decades, but also a fundamental aspect of contemporary accumulation. Aalbers and Fernandez (2016:2) therefore speak of ‘housing-centered financialization’ processes, pointing to the pivotal role of housing in the current ‘debt-led accumulation regime’. (Mortgage) debt lubricates the global economy by on the one hand absorbing a global pool of private and institutional capital, and on the other creating more effective demand through supplying households with fictious capital in the form of loans. This leads Aalbers (2008) to add a quaternary circuit, which represents the financial market, to the circulations of capital as spelled out by Harvey (2006) and Marx (1981).

2.2 Financialization as a lived process

The above described macro processes of financialization have only been possible through localized and embodied practices, as a growing body of literature on the micro and meso level of financialization has illustrated. Kaika and Ruggiero (2016) state that financialization should be conceptualized as a ‘lived process’ and highlight the embodied practices and struggles that are a crucial component of the ‘macro’ processes of capital accumulation. Weber (2002; 2010) shows, for example, how in the past decades neoliberalized spatial policies have eased the possibilities for capital switching over time and space, by making the urban environment more flexible and responsive to global investments. Ward and Swyngedouw (2018) furthermore highlight how corporate actors also drive land financialization processes from the ground up, restructuring urban space through the assetization of land.

Besides state-actors, land developers and financial actors, indebted households also play a key role in urban capitalization processes. This is especially the case for housing-centered financialization. Garcia-Lamarca and Kaika (2016) discuss how in Spain the financialization of housing has only been possible through a parallel biopolitical process that pushed households into mortgaged homeownership, simultaneously enrolling millions of lives into global real estate speculation structures. The promotion of mortgaged homeownership has not only transformed Spain, but can be recognized in a large number of (post)industrialized societies, such as the Netherlands, Japan, Australia, Britain and the United States (Ronald, 2008). This post-war global transformation has not been a natural process, but often a highly ideological and political project. Homeownership, through the belief that it enhances

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social and economic capital, has been an important element in the post-war expansion of a middle-class lifestyle (Forrest & Hirayama, 2015; Ronald, 2008).

2.3 The post-financial crisis nexus between housing and finance

The above introduced theoretical framework indicates how housing has become a fundamental aspect of contemporary accumulation processes. This results in a conflict of interests: while real estate as a financial asset profits from increasing house prices that yield more revenue, real estate as a shelter benefits from affordability and stability. Over the last decades, the investment value has often been favored over the user value, making households vulnerable to the ebbs and flows of economic markets (Fernandez & Aalbers, 2016). In times of economic prosperity this leads to increasing house prices and affordability issues, while periods of devaluation lead to harsh financial problems, negative equity, arrears, defaults, evictions and homelessness. This has been lively illustrated during the latest Global Financial Crisis (IMF, 2011). The financial turmoil of 2007-08 has had a profound impact on housing and mortgage markets worldwide. In response, many nation-states have taken steps to strengthen their mortgage lending systems. Typical measures include lowering Loan-to-Value ratios, decreasing amortization periods and stricter income requirements (IMF, 2011).

A decade after the Financial Crisis, a pioneering body of literature on the remaking of the nexus between housing and finance is starting to emerge. Forrest and Hirayama (2015) state that a new post-crisis homeownership system is developing in societies such as the UK, US and Japan, favoring the financial primes with private wealth, high income and a stable employment status. Mortgage lenders have turned to low-risk investment opportunities, further decreasing access to housing for the younger generation and lower- and middle-income households (ibid.). Ashton and Christophers (2018) investigated the remaking of the US mortgage market, and argue that, in that context, reforms were primarily targeting the quality of the commodity of the market in distress, i.e. mortgage products, rather than the mortgage market itself. In New Zealand and Australia, anti-crisis measures in the form of low interest rates, and housing market stimuli, are found to “reinforce the role of homeownership as a financial asset, and are creating conditions for further property booms” (Murphy, 2011:336). Beswick et al. (2016) bring together insides from the USA, Spain, Ireland, Greece and London and argue that post-crisis state action in these countries re-enforced the relationship between finance and urban space. The safeguarding of a housing and debt-based mode of accumulation, facilitates global equity funds to invest in urban real estate in these contexts (ibid.).

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This brief review of the limited number of contributions on the re-regulation of mortgage markets, hints that the Financial Crisis did not mark a dismantlement of the financialized housing system, but rather a rearrangement. Empirical studies, especially those that use qualitative methodologies, are however still rare. Building on the theoretical framework sketched in this chapter, I seek to construct such an empirical analysis of the responses to the Financial Crisis and its effects on the nexus between finance and real estate in Vancouver and Amsterdam.

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3. Methodology and Case Design

Building on the previously outlined theoretical foundation, this chapter lays out the methodology of this research. First, I discuss the design of my research, followed by the rationale behind the two selected cases, Vancouver and Amsterdam. Thereafter, the data collection and analysis strategies are explained.

3.1 Research Design

While the globalization of financial markets leads mortgage debt to be traded on a global scale, houses and their inhabitants are still localized in space. As stated in the introduction of this thesis, the urban environment is central in housing-based accumulation processes as prime spaces for capital absorption. Two cities, Vancouver and Amsterdam, are therefore chosen as the central stages for this comparative case study. A case-study approach allows for researching the complex and context-dependent nature of the financialization of mortgages and households. Case studies can produce in-depth knowledge that consider the multiple processes at stake (Yin, 1994). This approach provides situated and contextual knowledge on general theoretical concepts and assumptions (Abbott, 2004). Although cases do not necessarily produce knowledge that is directly generalizable, they can function as a window to the broader processes at work (Burawoy, 1998). By comparing and contrasting these two cities I aim to extend my cases and shed light on some structural explanations. This also suggests that the two cases are interrelated parts of a whole, and thus challenge the conventional take on comparative studies, which often conceptualize cases as separate self-contained systems, comparable only through abstracting them from their geographical and historical context (McMichael, 1990). On the contrary, the cases in this thesis demonstrate that, despite their distinct contexts, similar processes have unfolded in the two cities as they are both linked to processes of the globalization of finance and housing.It is important to note that although the urban level forms the primary focus in my thesis, regulations on mortgage and housing markets also plays out on the regional, national and even international scale. When appropriate, I therefore also speak of these levels in my thesis.

Case selection- Vancouver and Amsterdam have been chosen as cases for multiple reasons, summarized in Table 1. Firstly, both cities lay in countries characterized by an extreme degree of household debt. The Netherlands is second (after Denmark), and Canada ninth in the world when it comes to household debt as a percentage of disposable income (OECD, 2018). When it comes to household debt to GDP, the Netherlands and Canada are respectively on the fourth and fifth place

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(The Bank for International Settlements, 2014). In Canada, two-thirds of outstanding household debt consists out of mortgage debt. Canadian debt (general, not mortgage) to income ratios are the highest in the metropolitan area of Vancouver (242 percent, compared to an average of 170 percent in Canada) (CMHC, 2018b). In the Netherlands mortgage debt takes up an even higher percentage of all outstanding household debt; 88 percent (CBS, 2017b). Data on collective (mortgage) debt to income is not available on a city level for the Netherlands, but data on average outstanding mortgage debts indicates a concentration in Amsterdam. Homeowners in the city had an average of 200.000 euros mortgage debt outstanding, compared to 165.100 euros nationally in 2015 (CBS, 2017a).

The second reason for selecting Vancouver and Amsterdam is the relatively advanced financialized stage of their national mortgage markets. Both the Netherlands and Canada had a relatively large secondary1_{mortgage market before the Global Financial Crisis. In pre-crisis Canada (2005), almost 20} percent of the total outstanding loans were issued by non-bank, financial institutions. In the Netherlands this was much lower; namely around 8 percent which is the highest share found in European pre-crisis mortgage markets (IMF, 2008). According to IMF (2008), a high non-bank involvement is a good indicator of deregulated mortgage markets. Both pre-crisis Canada (0.57) and the Netherlands (0.71) score relatively high on the IMF mortgage market index2_{, which measures the} deregulation of mortgage markets and access to credit on a scale from 0 to 1. Countries such as Germany (0.28) and Japan (0.39) score much lower on this index.

A third rationale for the case selection is the unaffordability of houses on both markets. Vancouver has just been ranked as the second least affordable city in the world, calculated by dividing the median house price by the median income (Demographia, 2019). According to a recent report by Moody’s Investors Service (2019), Amsterdam’s owner-occupied sector is now the least affordable in Europe. Inhabitants there need on average 22 times their disposable income to purchase an average property without a mortgage, making it relatively more expensive than London and Paris (Moody's Investors Service, 2019).

As this thesis focusses on state responses to the financial crisis and its effects on the mortgage and housing market, the fourth selection criterium was the high level of state intervention after the crisis.

1_{a secondary mortgage market is the market were mortgage loans are traded between lenders and investors,}

which gives a good indication of the financialization of the mortgage market.

2_{The index is based on Loan-to-Value ratios, possibilities for home equity withdraw, refinancing options, average}

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Both national governments implemented a series of mortgage lending regulatory changes (IMF, 2011), which makes them a fitting choice for this thesis.

Table 1. Comparative overview of the two cases

Amsterdam Vancouver

Mortgage Debt-to-GDP

National scale 94% 66%

House price growth between 2013-2018 64% 58% Income growth

2013-2018 4% 12%

Share owner-occupancy

2006

25% 65% IMF Mortgage Market Index

National scale

(Measures access to credit and liberalization of mortgage market)

0.71/1 0.59/1

Source: Author based on CBS(2017b), CMHC (2012), CMHC (2018b), CMHC(2018d), IMF (2008), Knight Frank (2019), OIS (2019), World Bank (2019)

The sheer amount of household mortgage debt, housing affordability issues and the highly developed stage of (mortgage) financialization indicate that Vancouver and Amsterdam can be typified as

extreme cases (Gerring, 2007). Although extreme cases are never representative for their population,

they can, precisely because of the intensity of the dimensions of interest, yield interesting theoretical insights in the processes at stake (Gerring, 2007; Yin, 1994). In other words, the highly financialized, household indebted stage and affordability issues of the two cases will provide the opportunity to investigate the state responses to the financial crisis and its effects on access to housing in extremity. Although these inferences will not be generalizable to all financialized post-crisis mortgage and housing markets, it will shed light on some of the processes and mechanisms of household indebted cities after the Financial Crisis. The high level of resemblance furthermore indicates that Vancouver and Amsterdam are most-similar cases. As described in the Theoretical Framework, theoretical contributions on the post-crisis reformation of the housing-finance nexus are still relatively rare. A comparative strategy that looks for similarities, can add to such broader theoretic arguments (Skocpol & Somers, 1980).There are of course also differences between the cities. The previously presented comparison (see Table 1), indicates that Amsterdam has much higher levels of mortgage debt, more severe affordability issues, and easier access to credit (pre-crisis). This indicates that the case of Amsterdam is even more extreme than Vancouver. However, the share of owner-occupancy is much lower in Amsterdam, due to its history of public housing.

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3.2 Data collection and analysis

Fieldwork was conducted in Vancouver from September 2018 to January 2019, and thereafter in Amsterdam from January 2019 to April 2019. In order to answer the research questions, a mixed-methods strategy was used for the collection of data. This included interviews with mortgage brokers, lenders and government officials, quantitative data sets and policy documents. Below a detailed description of the used methodologies, and their rationales, is discussed.

Mortgage brokers and lenders- Mortgage brokers and lenders are experts on contemporary lending and borrowing practices. Mortgage brokers most often know the lending regulations inside out and can shed light on the challenges that their clients face, and to what strategies and solutions this leads. They have insights in the experiences of a multitude of households, which expands the scope of the results. Employees and representatives of key mortgage lending institutes have, similar to brokers, inside information on lending regulations and their impacts. Whereas the mortgage brokers are primarily used as informants on the borrowing side, lenders can provide insights in the lending side of the field. The interviewed mortgage brokers and lenders could furthermore expand on changes over time, as most of them have been working in the field for a longer period of time (ranging between 5 to 20 years). These facets make mortgage brokers and lenders very valuable informants.

Government officials- Besides mortgage brokers and lenders, government officials working in the banking and mortgage sector (from Canada Mortgage and Housing Corporation and The Central Dutch Bank) were interviewed. These interviews were mainly used to gather inside and expert knowledge on the (rationale behind) regulatory changes during and after the financial crisis.

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Table 2. Overview of the respondents in Vancouver and Amsterdam

Vancouver

VA-A Governement employee at CMHC 9-nov

VA-B Governement employee at CMHC 20-nov

VA-C Mortgage Insurance provider 16-nov

VA-D Mortgage broker (independent) 3-nov

VA-E Mortgage broker (independent) 12-nov

VA-F Mortgage broker (independent) nov

VA-G Mortgage broker (independent) 30-nov

VA-H Mortgage broker (independent) 13-dec

VA-I Mortgage broker (independent) 15-dec

VA-J Representative of association of mortgage brokers 19-nov VA-K Mortgage specialist (working for bank) 9-okt

VA-L Mortgage specialist (working for bank) 9-nov

VA-M Mortgage specialist (working for bank) 8-nov

VA-N Mortgage specialist (working for bank) 13-nov

VA-O Alternative lending institution 4-dec

VA-P Traditional Lending institution 27-nov

not used Household 26-okt

not used Household 31-okt

not used Household 17-nov

Total used Vancouver 16

Amsterdam

AM-A Association of Dutch Banks 19-mrt

AM-B Association of Dutch Banks 22-mrt

AM-C Representative of Central Dutch bank 27-mrt

AM-D Mortgage broker (independent) 7-mrt

AM-E Mortgage broker (independent) 12-mrt

AM-F Mortgage broker (independent) 26-feb

AM-G Mortgage broker (independent) 11-mrt

AM-H Mortgage broker (independent) 11-apr

AM-I Mortgage broker (independent) 2-apr

AM-J Mortgage expert 3-apr

AM-K Mortgage lender (bank) 29-mrt

AM-L Mortgage lender (non-banking) 26-mrt

AM-M Mortgage lender (non-banking) 21-mrt

Total Amsterdam 13

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In order to select relevant interviewees, an overview of the lending field in both Vancouver and Amsterdam was made. Thereafter, mortgage brokers and lending specialists for each important mortgage lending institute were contacted in both cases. In Vancouver, this resulted in representatives of 4 out of the 6 largest mortgage institutes, in Amsterdam 3 out of 7 institutes participated. I furthermore contacted independent mortgage brokers (not working for a specific lending institute). They were selected through overview webpages of active mortgage brokers in Vancouver and Amsterdam. In total 70 people/institutes were approached through email. In the case of non-response, follow up emails were sent. This resulted in a total of 32 interviews (19 interviews in Vancouver and 13 interviews in Amsterdam). The imbalance in number between the two cases is mainly due to some last-minute cancelations (3) in Amsterdam.

The experience of the indebted household was also taken into account. However, access to indebted households proved difficult. After two months of interview requests through local Facebook groups, snow-balling and mortgage agencies in Vancouver, only three households were willing to talk about their experiences of indebtedness. These difficulties with response in Vancouver combined with time restrictions led me to not pursue household interviews in Amsterdam. In Amsterdam I did however, observe a meeting on debt in Amsterdam organized by the NGO HUMANITAS. I furthermore participated in an interview of one of their volunteers, who is an expert on indebtedness in Amsterdam. Although not directly included in this thesis, the household interviews in Vancouver and meetings in Amsterdam, provided background information on the experience and regulations around (mortgage) debt. This also contributed to defining the scope of this thesis.

The interviews lasted between 30 and 90 minutes. 20 interviews were done in person, 12 over the phone, and one respondent provided answers through emails. All respondents were asked to sign a consent form (Appendix A). Every interviewee was anonymized and given a code to ensure confidentially and encourage them to provide sensitive information. Table 2 provides an overview of all 32 respondents, their function and their code in this thesis.

A semi-structured interview technique was used with all respondents. The questions were slightly adapted for each respondent, depending on his or her expertise. The three following themes, based on the research questions, were the major topics of discussion; 1. The pre-crisis mortgage and housing field. 2. The regulatory changes related to mortgages and housing as a response to the crisis. 3. The effects of these changes on lending and borrowing practices. During the interviews there was room

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for the respondents to come up with themes that they deemed relevant. All interviews were recorded and transcribed by the author.

Quantitative data, policy documents and secondary data- The qualitative data was supplemented and triangulated with quantitative data, policy documents and academic literature on the mortgage sector in Vancouver and Amsterdam. These included for Vancouver; the Canadian Federal Budget reports from 2008 until 2018 (but predominantly the budget of 2014, as a number of new regulations were presented in that year), a series of market insight reports published by the Bank of Canada (2013, 2016 and 2017), aggregated longitudinal datasets on the volume of public securitization, private securitization and outstanding mortgage debt published by the Canadian Mortgage and Housing Corporation (CMHC) and (unpublished) reports on the private lending sector provided by the interviewed government respondents. For Amsterdam government documents on measures taken during the Global Financial Crisis, data on mortgage funding streams provided by the Dutch Central Bank, datasets on outstanding mortgage debt and data on tenure composition between 1990-2018 provided by OIS Amsterdam (Research, Statistics and Information Amsterdam) were studied. The last dataset is unpublished, but made available to the author by OIS Amsterdam on request. An overview of all the studied policy and other institutional documents is attached in Appendix B.

Analysis- The interviews were analyzed through coding the transcripts. Qualitative coding is a technique that analyzes data through grouping different segments into relating themes and categories. Giving codes to the data is a first exploration, looking for patterns and differences in order to answer the research questions (Strauss & Corbin, 1997). In this project I used a deductive (using predefined codes), as well as an inductive (using codes that came out of the data) approach. Predefined codes were constructed on the base of the theoretical framework and guiding research (sub-)questions. Coding was done manually through using Word Office. In Appendix C an overview of the used coding strategy is provided. The policy documents and other key institutional documents were analyzed on the bases of similar codes. They were furthermore closely read, looking for relevant contextual information, changes in regulation and policy rationales. Dutch direct quotes from the interviews and document analysis used in the thesis were translated by the author. Although, I stayed as close to the original formulation as possible, a word-by-word translation was not always possible as I tried to ensure comprehensiveness. The quantitative data was analyzed by using general descriptive statistical techniques (e.g. averages, medians, growth/decrease). The time frame of the

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analysis of quantitative data varies per dataset and is determined by the availability, relevancy and comparability of the data source.

This mixed methods approach develops deep knowledge on the context, regulatory changes, and practices from multiple perspectives (mortgage lenders, government officials, mortgage brokers, and households through the lens of mortgage brokers). Mobilizing both quantitative and qualitative data sources furthermore ensures a grounded empirical understanding of aggregated datasets and abstract policy documents.

3.3 Data limitations

Although mortgage brokers and lenders are good informants for changes in the mortgage and housing sector, relying on them has some limitations. Firstly, households that are so discouraged by the situation on the housing market that they do not even investigate the possibilities of a mortgage, are not included in the thesis. Secondly, mortgage brokers and lenders might not be transparent about the full scope of practices that they come across. It is especially likely that practices bordering legality, such as hiding debts or faking income requirements, are not enclosed. I decreased this chance by ensuring absolute anonymity, although full openness of respondents can never be assured. Thirdly, all respondents, mortgage brokers, mortgage lenders and government officials, were used as informants on state responses and effects. Although they are all experts in the field, this method does have a risk of a bias. Triangulation with other respondents, policy documents, and media analysis was thus used whenever possible.

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PART TWO -

DATA ANALYSIS

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4. Sub-Question I: Establishing the Housing-Finance Nexus

Housing has not always been as strongly tied into global financial markets as it is now. In this chapter I will discuss how housing has become a financialized good in both Vancouver and Amsterdam, and how this has led to high degrees of household mortgage indebtedness. The first sub-question will be central in this chapter:

What are the respective local and national pre-crisis developments that have established the nexus

between housing and finance Vancouver and Amsterdam?

There are multiple points in history where one could start such an overview. A full historical discussion of mortgages and housing policy does not lay in the scope of this thesis. Therefore, in this chapter, I focus on the period of time starting around the 70s (Vancouver) and 80s (Amsterdam) until the Global Financial Crisis in 2007. Through analyzing datasets on outstanding mortgage debt and GDP, homeownership, tenure composition, policy documents, academic literature and interviews with key actors, I show how two main but interrelated and mutually reinforcing developments can be seen in this period; 1) the fertilization of the urban environment for (global) investment, and 2) the state promoted expansion of the mortgage market. Together these developments contributed to a strong nexus between housing and finance in Vancouver as well as in Amsterdam. First, I will present a historical overview of relevant housing and mortgage developments in Vancouver, followed by a similar discussion related to the context of Amsterdam. This chapter will conclude with a case comparison and a link back to other academic contributions.

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4.1 Vancouver: establishing the housing-finance nexus

In the period before the crisis, lending standards were relaxed, mortgage interest rates decreased and homeownership and household debt levels heavily increased in Canada. In this section I show how this was not a natural process, but actively stimulated by all levels of the government at that time. This strengthened ties between housing and finance in two ways, as will be discussed below.

I. Fertilizing the urban environment for (global) investment

A parliamentary overview of housing policies and programs since the 1930s (Begin & Casavant, 1999) shows that the active promotion of homeownership started in the 70s with several federal programs and regulations. These include; enabling lower-income households to purchase a house with the ‘Assisted Homeownership program’, excluding principal residences from capital gain taxes and allowing spousal incomes to be included for the calculation of maximum mortgage loans. These changes promoted homeownership among lower-income groups and increased the borrowing capacity of double-income households. Figure 1 illustrates that between 1971 and 2006 homeownership rates increased from 60.3 percent to 68.4 percent in Canada, and from 58.8 to 65.1 percent in Vancouver (CMHC, 2014a).

Figure 1. Homeownership rates, Canada and Vancouver 1971-2006

Homeownership rates are computed as owners divided by total of all tenure types. Rates in Vancouver are for the Metropolitan Area of Vancouver. Source: Author based on CMHC (2014b)

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Figure 1 also shows that homeownership rates really started to increase, nationally, but especially in Vancouver, from 1986 onwards. In that year, the federal government launched its New Housing Directions program. In parallel with the promotion of homeownership, this program meant a significant revision of the federal approach to social housing. Social housing, promoted during the 60s and 70s, was now deemed too expensive and not targeting the right groups (Loptson, 2017). Whereas before mixed-income projects were targeted, social housing policy now solely focused on low-income households “in core need”. It, furthermore, devolved the provision of social housing towards provincial and territorial governments (Begin & Casavant, 1999; Wolfe, 1998). In 1992, federal funding of social housing stopped all together. This resulted in a disastrous decline of new-built social housing units nationwide (from around 12 percent in 1986, to 3 percent of all new units in 2006 (Walks & Clifford, 2015)).

When federal funding for social housing was ceased in 1992, the province of British Columbia (home of Vancouver) took over. With less money available, the production of new social housing units was reduced by 50 percent (Hyde, 2018). In 2001, a new liberal government came into power in the province which ended the provincial social housing program altogether (Hyde, 2018). Since 1988, the City of Vancouver requires that 20 percent of the housing units in new neighborhoods is designated to non-market housing. However, without federal or provincial subsidies this requirement was often not met (Mah & Hackworth, 2011).

Additionally, the provincial government privatized large areas of land in Vancouver during the 80s. These plots were first made more attractive through rezoning, and thereafter marketized specifically among international investors from the Pacific Rim (Vanwynsberghe et al., 2013). The marketing campaign was successful and an extensive part of, for example, downtown Vancouver was bought by a billionaire from Hong Kong (Mitchell, 1995). The local government furthermore, made regeneration and infrastructure investments to fertilize the city for mega -events and -projects such as the World Exposition in 1986 (Barnes & Hutton, 2009). Moreover, the Business Immigration Program (BIP) aimed at attracting wealthy individuals into Canada, was launched in 1984. This program stimulated investors and entrepreneurs bringing in a significant amount of capital into the country by offering them permanent residency and later citizenship in Canada. This was particularly appealing to a class of wealthy individuals in Hong Kong, that feared the planned changeover from British to Chinese control in 1997. The program brought a total of 330,000 people into Canada between 1980 and 2001 (Ley, 2017), of which a large number landed in Vancouver, either directly or through secondary migration (Ley, 2017; Ware et al., 2010). A large part of their capital was invested in either the real estate sector,

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as most of the immigrants from Greater China soon became homeowners themselves (Hiebert, 2009; Ley, 2011), and/or in urban development projects (Mitchell, 1993). This led Mitchell (2004) to conclude that from the 80s onwards urban policy, stemming from all levels of the government, shifted towards making the city of Vancouver an attractive environment for global investments.

Figure 2 depicts an analysis of a CMHC dataset on the tenure composition of the occupied housing stock in Vancouver. The figure illustrates how from 1991 the share of owner-occupied dwellings grew significantly, from 57 percent to 65 percent, while the share of rental units decreased from 43 percent to 35 percent in 2007. This indicates the materialized consequences of the above described process, gradually transforming Vancouver’s real estate into a commodifiable good.

Figure 2. Tenure composition of the occupied housing stock, Vancouver 1991-2006

Reflects the share of the owner-occupied and rental tenure group of all occupied units in Metro Vancouver from 1991 (first year data available) to 2006. Source: Author based on CMHC (2014)

II. The state promoted expansion of the mortgage market

A second key finding emerging from the data is the state promoted expansion of the mortgage market. This was done through a simultaneous deregulation and stimulation of the Canadian banking and mortgage sector from 1980s onwards. Historic foreign ownership-restrictions for banks were removed, just as numerous state-based regulations on the separation of financial activities (Tickell, 2000). This led financial institutions to expand their offshore connections, attracting capital across the globe. Especially, financial and migration flows from Hong Kong to Vancouver were stimulated (Mitchell, 2001). By reducing restrictions, the federal government aimed at enhancing competition in the banking sector (Brean et al., 2011).

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A second way of stimulating the banking and mortgage sector was the establishment of two public securitization programs (Loptson, 2017; Walks & Clifford, 2015), both run by the crown company ‘Canada Mortgage and Securitization Corporation’ (CMHC). Securitization is a process through which mortgage loans are packed together and sold on the capital market. The first program, the National Housing Act Mortgage-Backed Securities (NHA MBS), was set up in 1986. The NHA MBS bonds only include pools of government-backed residential mortgages. These insured mortgages are perceived by investors as risk free products, as in the case of mortgage defaults, payment is guaranteed by the Canadian government (CMHC, 2012).

The second program, Canadian Mortgage Bonds (CMB), was launched in 2001 (Walks & Clifford, 2015). With the CMB program CMHC not only guarantees bonds of residential mortgages, but also buys mortgages from lenders and sells them to (international) investors. As such, this program takes the outstanding debts off the balance sheets of Canadian banks and thus allows lenders to originate more mortgage loans (CMHC, 2012). Between the establishment of the first program in 1986 and the beginning of the crisis, the federal government expanded the programs by making more types of mortgages eligible for securitization, including mortgages without down payments (Walks, 2014).

According to the analyzed CMHC policy document (2012) the programs aim at decreasing the costs of mortgage lending, increasing competition in the mortgage market and increasing accessibility to mortgage loans for Canadian households, as the following quote from the document illustrates;

“The NHA MBS and CMB programs (…) [ensures] that lenders and, in turn borrowers, have access to an adequate supply of funding for mortgages. (…) Since their inception, CMHC’s securitization programs have facilitated the availability of mortgage credit to Canadians. (…) The NHA MBS and CMB programs have also promoted competition in the mortgage market by providing a broad range of lenders with a cost-effective source of funding.” CMHC (2012:

2-12).

The programs were successful, and soon became a major source of funding for mortgage loans, especially for smaller non-depository institutions (CMHC, 2012).That this in turn lowers the borrow costs for households, is also recognized by respondent VA-F, an independent mortgage broker in Vancouver;

“An insured mortgage, by CMHC, has the best interest rates, because the lender can securitize it (sell it as a mortgage backed security in the stock market or bond market) and make much more than the contract interest rate. So, consumers see the sharpest rates on insured mortgages.” (Respondent VA-F, independent mortgage broker in Vancouver, November 2018).

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A third way of enhancing competition in the mortgage sector was through offering state guarantee (of 90 percent) to two new private mortgage insurers. Previously, state guarantee (100 percent) was restricted to mortgage insurance provided by CMHC. As all insured mortgages were now guaranteed by the federal government, lenders treated them as no or very low risk. This lowers the costs of lending and relieves financial institutions of (some of) their capital holding requirement, as respondent VA-A, senior housing advisor at CMHC, explains:

“If you insure a mortgage, essentially, there is no risk to the lender anymore... They [the lender then] don't have to hold as much capital against the loan. So if you can insure that loan for let’s say half a percent of the value of the loan, at one point (…) it's cheaper to pay the insurance fee than to hold the capital that is required to back up otherwise” (Respondent VA-A, government employee at CMHC, November 2018)

The expansion of state guarantee was followed by giving the publicly owned insurance provider CMHC the mandate to operate on a commercial for-profit basis. This allowed CMHC to compete with the private insurance companies. The federal government hoped these measures would lead to lower interest rates and product innovation, and as such, stimulate the mortgage sector further (Walks & Clifford, 2015). This was indeed the case, and from 2000 onwards all three insurance providers started to insure riskier mortgages (with zero down payments, interest-only payment structures, poor credit scores, and self-employed mortgages that did not require traditional prove of income) and extended their maximum amortization period from 25 to 40 years (Walks & Clifford, 2015). Respondent VA-M, mortgage specialist at a large local bank remembers that time:

“When I bought my home, a 25 years amortization was standard with 10 percent down payment. Then it changed to 5 percent, and 40 years amortization. And a lot of people took on those mortgages. It was back, when I started in 2004, around that time. Pre-crisis. (…) At that time a lot of people were leveraging so much... A lot of customers with ten rentals, with 5 per cent [down payment]... And then they borrow against that house... They became highly leveraged.” (Respondent VA-M, mortgage specialist for a major bank in Vancouver, November 2018)

The high degree of leverage that this mortgage broker saw, is confirmed by quantitative data sources. By combining data on outstanding mortgage debt (StatCan, 2017) and data on the GDP of Canada (World Bank, 2019), Figure 3 shows the enormous growth of residential household mortgage debt before the financial crisis, which more than doubled from 17.5 to 45.6 percent of GDP between 1970

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and 2007. As the public securitization and guarantee programs make that mortgage lenders and bond and security holders would be paid with public funds in the case of defaults, Canadian households not only became highly leveraged before the crisis, but also responsible for the risks of mortgage lending and securitizations. The programs were, furthermore, going to play a crucial role during the financial crisis as will be discussed in Chapter Five.

Figure 3. Residential mortgage debt to GDP, Canada 1970-2006

Residential Mortgage Debt is measured by the collective outstanding seasonally adjusted balances at the end of January of each year. GDP is in Canadian dollars, corrected by inflation. Source: Author based on StatCan (2019) and World Bank (2019)

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4.2 Amsterdam: establishing a housing-finance nexus

In the two decades before the financial crisis, the Dutch government (both national and local) significantly promoted homeownership. The housing sector in the Netherlands used to be characterized by relatively low levels of owner-occupied housing (Aalbers, 2004). The national push towards homeownership was justified by its assumed positive effects on citizenship, responsibility and neighborhood participation. It was, moreover, argued that homeownership created wealth on a personal (buying a house is seen as an investment) level as well as a macro-economic level (due to the increased expenditures of surplus values) (Van Gent, 2010). This had serious ramifications for the city of Amsterdam. For a long time, Amsterdam had a reputation for being the prototype of a just city, characterized by a large decommodified housing stock, generally accessible to all income groups (Fainstein, 2010). However, from the 1990s onwards, a large share of the renowned public housing stock got sold on the market, making the image of a just city something of the past (Hochstenbach, 2017a; Kadi & Musterd, 2015; Van Gent, 2013). In this chapter I will discuss the pre-crisis developments that established a housing-finance nexus, leading to a sheer expansion of mortgage debt.

I. Fertilizing the urban environment for (global) investment

During the pre-crisis period a number of policy changes, both local and national, have been implemented that prepared the city of Amsterdam for financial investment. This was mainly done through a reformation of the housing sector. 1989 can be seen as a turning point in Dutch housing policy. After decades of expansion of non-profit public housing, the national government cut its financial ties with housing associations. The decrease of subsidies forced the associations to move towards a more market-oriented approach, which resulted in selling off of social housing, or its demolishment and replacement with owner-occupied housing (Aalbers, 2004). On top of that, homeownership was stimulated by offering financial assistance to tenants who wanted to purchase their home (Elsinga, 2003). The owner-occupied tenure was thus not only promoted through stimulating new construction projects, but also through altering the existing stock and tenure contracts.

The national push towards homeownership continued further via the housing memorandum, published in 2001. With this document the central government aimed at increasing homeownership rates to 65 percent by 2010 (Aalbers, 2004; Van Gent, 2013). The seeds planted with the privatization of housing associations in 1989, now got further fertilized by setting targets for tenure conversion and the construction of owner-occupied units (Kadi & Musterd, 2015). The financial assistance for buying

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a rental home introduced in 1989 was furthermore extended from solely tenants, to all lower-income groups (Elsinga, 2003). These policy measures thus encouraged homeownership among low-income groups and continued the promotion of tenure conversion towards owner-occupation.

Initially, local policy makers in Amsterdam were hesitant in following the national promotion of homeownership, as it was a sharp break with the social housing tradition. Housing associations were therefore reluctant in selling off their social housing in Amsterdam, despite their deregulation during the 1990s. However, at the turn of the century, the expansion of the homeownership started to kick off in the city too (Aalbers & Holm, 2008; Kadi & Musterd, 2015; Van Gent, 2013). Housing associations started to formulate explicit objectives regarding the sale of social housing, and quotas were installed for each city district. The local government started to embrace this new policy discourse, and actively pursued gentrification processes, aiming to attract (and keep) middle- and higher-income groups to and in the city. It, furthermore, intended to push middle-income groups out of social rental housing and into owner-occupied tenure (van Gent, 2013; Hochstenbach, 2017b). Figure 4, depicting the tenure composition of Amsterdam, shows that the housing sector reforms had a huge effect on Amsterdam. The city, once known for its extensive social housing sector, saw a rapid increase of owner-occupied dwellings. In 1992, owner-occupied dwellings only made up 10 percent of the total housing stock, by 2007 this had already increased to 25 percent (OIS, 2018).

Figure 4. Tenure composition of housing stock, Amsterdam 1992-2007

Reflects the percentage of owner-occupied and rental stock (private and social) in Amsterdam between 1992 (first year data available) and 2007. Source: Author based on OIS (2019)

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II. The state promoted expansion of the mortgage market

A second key development that emerged from the data, was the expansion of the banking and mortgage sector. The national government stimulated this expansion in a number of ways. First through the establishment of a national, privatized mortgage guarantee scheme in 1995. This new system replaced a decentralized municipal guarantee scheme (Elsinga, 2003; Priemus, 2013). Within the new scheme, mortgages are guaranteed by the non-profit organization ‘Stichting Waarborgfonds Eigen Woningen’ (SWEF, Homeownership Guarantee Fund). The central government, however, provides a backing function in the case of a default of the privatized fund. Mortgages insured by the SWEF are therefore treated by the Dutch Central Bank as a fully government guaranteed, and ‘free’ of risk (from the perspective of the investor) loans (Priemus, 2013). This scheme reduced the costs and capital requirements for banks issuing insured mortgages and thus stimulated the mortgage sector by increasing “accessibility of funding, affordability for the client and stability of the market” (SWEW, 2018:5). This effect was confirmed by all the respondents working for mortgage lending institutions (respondents AM-A, -B, -K, -L, -M March 2019). Respondent AM-K, a mortgage specialist at a major lending institution in the Netherlands, explains;

“Guaranteed mortgage insurance is very important for a bank. It means they have to hold less capital, which has many benefits.” (Respondent AM-K, mortgage specialist at a major Dutch bank, March 2018)

Another way in which the national government stimulated homeownership and mortgage debt was through the full deductibility of mortgage interest from taxable income. Despite the general trend towards deregulation and privatization, the tax relief scheme remained relatively3_{untouched during} the 1980s and 1990s. Arguably, this lack of policy change has also been an important driver of homeownership and mortgage debt in the period between 1980-2007. The tax relief not only cost the general tax payer a substantial amount of money (12.7 billion euros in 2007, (Ronald & Dol, 2011)), it also encouraged households to take on larger mortgage loans with high interest rates (Scanlon & Elsinga, 2014). On average, homeowners receive 40 percent of their paid mortgage interest back as a tax benefit (Dutch Banking Association, 2014). One of the respondents explains how mortgage interest tax deductibility promoted mortgage debt:

3_{Some small changes were made, such as the abolishment of deductibility of interest paid on a second home}

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“Those incentives were pretty perverse, and still are: the more debt you take, the more you can save on taxes (…) That debt creation, before the crisis, was definitely one of the reasons for the increase in house prices.” (Respondent AM-K, mortgage specialist at a major Dutch bank, March 2019)

Stimulated by the national promotion of the mortgage sector, several innovations in the banking sector also contributed to the expansion of the mortgage debt. In the early 1990s, banks started to expand their credit limits in several ways. Whereas lending institutions previously only agreed on Loan-to-Value ratios of more than 100 percent for mortgages insured by the SWEF, they now started to issue loans up to 112 percent of the real estate value, even without insurance (Boelhouwer & Schiffer, 2015). Also, the limit on housing expenses, used by banks, increased in those years. Before 1990, limits of 30 percent were rare, while by 1999, 33 percent was the average (Aalbers, 2011). Banks, furthermore, started to take a second income (partly) into account, and became increasingly lenient in their acceptance policies (Aalbers, 2011; Kakes et al., 2017). This development was confirmed by the interviews with mortgage lenders and brokers active in the period before the crisis (Respondents AM-J,-K and- H, March and April 2019). A former CEO of a mortgage lending company at that time remembers well;

“You see that people could borrow more and more. First you could borrow four times your income, that got raised to six times (…) with a variety of ways the borrow capacity of household got artificially increased in the period before the financial crisis. You saw two things; people could borrow more money, and house prices increased.” (Respondent AM-J, former CEO of a Dutch mortgage lending institute, April 2019)

At the same time, a number of new mortgage products were introduced. Interest-only, life insurance and investment mortgage types made their way into the market in the early 90s (see Table 3 for their characteristics) (Rouwendal, 2007; Scanlon et al., 2008). With a traditional mortgage, households repay part of the loan plus interest. With these new products, typically only interest is paid, whereas the actual loan is not repaid until the end of the term (or refinanced with a new loan). Interest-only products are therefore considered risky, especially in the event of decreasing house prices, as actual repayment of the mortgage is not guaranteed. This is not always realized by households, as respondent AM-J explains;

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“One of the most common fallacies among homeowners is that you do not have to repay an interest-only loan. But of course, this loan also has to be repaid at the end of the term. People do not tend to think about that, as that moment lies far away.” (Respondent AM-J, former CEO of a Dutch mortgage lending institute, April 2019)

This is especially problematic in the event of decreasing house prices, changing acceptance and lending regulations or reduced household income. In those cases, the household might not be able to pay off or refinance its original loan, risking forced sale and/or residual debt. Despite the risks of these mortgages, interest-only products became extremely popular in the Netherlands (Respondents AM-E, -D, -J February to April 2019; Scanlon et al., 2008) as they reduced monthly payments for households and were most rewarding in terms of interest deductibility. An interest-only mortgage combined with a savings or investment mortgage (see Table 3) made a mortgage loan (almost) free:

“A savings mortgage is the most beautiful type of mortgage we ever had (…) In thirty years, you saved up towards repaying your principal, while earning the same share of interest on your savings as you were paying on your loan. At the same time the client received full mortgage interest deductibility and did not have to pay taxes on its savings.” (Respondent AM-F, Mortgage broker in Amsterdam, 26th_{February 2019)}

Table 3. Most prevalent mortgage contracts in the Netherlands and their characteristics

Mortgage contract Characteristics

Annuity mortgage Every month the borrower repays a share of the mortgage debt and a part interest payment. The total amount of monthly costs stays fixed, the amount of interest increases over the years.

Linear mortgage Similar to the annuity contract. However, with this type of contract, only the monthly principal mortgage repayment stays fixed. The interest payment decreases over the years.

Interest-only mortgages No capital is repaid. The borrower only pays mortgage interest on the loan.

Savings and or investment-based mortgages (investment, savings, hybrid and endowment)

Forms of interest-only mortgages. No capital is repaid, instead the borrower saves and/or invests money to pay off the mortgage at the end of the mortgage term. The return of the savings deposit should be equal to the mortgage interest rate.

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In 1993, pure interest-only mortgages made up 3.4 percent of all new mortgages across the Netherlands, while by 2006 this had risen to 44 percent. In combination with a repayment vehicle such as an investment or savings mortgage, interest-only mortgages even accounted for 88 percent of all new mortgages in 2006 (Scanlon et al., 2008).

In conjunction with the increase in credit availability, a Dutch mortgage securitization market was established in 1996. Securitization practices supported and fueled the expansion of mortgage debt as it allowed banks to sell off some of the mortgages on capital markets and use the revenues as funding for new loans (Aalbers et al., 2011). This also artificially removed the risks of mortgage loans off their balance sheets and made it easy to circumnavigate international requirements regarding their capital reserves (DNB, 2010). Within a decade, the Dutch securitization market grew significantly and became renowned in the European securitization market. By 2009, the total volume of Dutch securitizations amounted to 350 billion euros, of which 200 billion originated from mortgage loans (DNB, 2010). This is also reflected in the share of mortgage debt on the balance of Dutch banks, which rose from 12 percent in the early 90s to more than 20 percent just before the crisis, and this does not even include the mortgages moved off the balance with securitization techniques (Kakes et al., 2017).

The quantitative data, depicted in Figure 5, shows that the reforms of the housing sector and the state led-expansion of the mortgage sector went in tandem with a sheer increase of mortgage debt on the balance of Dutch households. The figure illustrates that the collective residential mortgage debt as a share of the Dutch GDP grew from 54 percent in 1995 to 96 percent in 2007 (data before 1995 or on the scale of Amsterdam is not available).

Figure 5. Mortgage debt to GDP, Netherlands 1989-2007

This figure shows the collective outstanding residential mortgage debt as a share of the Gross Domestic Product in the Netherlands between 1989 (first year data available) and 2007. Source: Author based on CBS (2005; 2014; 2019)