The Amsterdam Housing Market - a Global Analysis of the Market Mechanism

The Amsterdam Housing Market

–   a global analysis of the market mechanism   –

Boudewijn Edmond Hasselman

TIAS University

December 2018

Walk into any Amsterdam cafe and talk about far too expensive buildings, some Amsterdam students spend half their monthly spending on a roof over their heads and the media have been talking about complete chaos on the Amsterdam housing market for years. And that is not so strange; in the period between March 2015 and March 2017, the average Amsterdam house price increased by 46%. For comparison: in the Netherlands this increase was 5%. Is this a question of supply and demand or is there more behind it? This exorbitant price rise not only brings a lot of commotion, it also disrupts the housing market. And disruption of a primary necessity of life, such as living, requires government intervention. But what does the government do to regulate the housing market? A global study into the phenomenon of living in Amsterdam.

The pricing and the alleged bubble will first be discussed. We then zoom in on the housing market as a market mechanism, market efficiency and price elasticity. Both the demand and the supply side are then discussed in detail. On the demand side, we look at the influence of urbanization, the arrival of private and institutional investors, the changing use of income, the popularity of Airbnb, the Brexit and legislation. On the supply side, we shed light on various restrictions, such as social rent versus the free sector, planning restrictions, mortgage interest deduction, Airbnb for the provider, the reputation of the municipality of Amsterdam and its good intentions. Finally, a recommendation is made.

Pricing: bubble or consequence of?

You can hardly escape it: the alleged housing bubble in Amsterdam. But is there a bubble? To be able to answer that, we have to look at how the price of Amsterdam homes comes about. According to Droës et al (2017), four underlying factors underlie this: observable housing characteristics, the macro-economy, non-observable housing characteristics and unexplained reasons. In his research, Amsterdam house prices are corrected for the first three factors, after which the price increase that cannot be explained remains. Exactly this price increase is an indication of a bubble.

The price change as a result of observable housing characteristics outlines the typical causal relationship between the demand for a product and the quality of the supply. Testing was carried out on living space, type of home, year of construction, parking, garden area, maintenance and location. The larger the villa, the higher the price and the more cars you can place in front of the door, the more you pay. They are simple examples of the interplay between supply and demand and the resulting pricing. Amsterdam is no exception. By correcting price changes for this, the logic of economic science is filtered and the bubble underlined.

In addition, there are also macroeconomic factors that affect the housing market. By correcting the price change for these variables, the bubble is also partially demonstrated. Of interest are variables such as the interbank interest rate, the mortgage interest rate, the income growth and the average rent in the free sector. The fact is that low interest rates make buying a home more attractive and a low rental price has a dampening effect on the demand for owner-occupied homes. These are standard economic phenomena that must be filtered out of the price change.

There are also non-observable factors that have an impact on the price of homes. Consider the energy efficiency of homes, the degree of adaptability of the home and the presence or potential of local facilities. It is likely that these factors influence the price. For example, a green energy label will increase prices and the absence of nearby sports facilities will actually reduce the price. After these price corrections, only the inexplicable price change remains: the bubble.

From 2002, the price index adjusted for the above factors shows two periods of intense inexplicable price increase: between December 2006 and June 2008 and between March 2013 and now. It thus appears that we can indeed speak of a housing bubble at the moment; the price increase cannot be explained by measurable and price-increasing variables such as the construction of larger gardens, a distressingly low interest rate or climate-neutral lounges. From the results the following is striking: the Amsterdam housing market is experiencing fierce price fluctuations and moreover we are currently in the largest inexplicable boom or bubble since the baseline measurement in 1992. But is this bubble so inexplicable? Let us look at possible causes for the exuberant price increase, for which this has not been corrected in the study by Droës et al (2017). For this, the Amsterdam housing market is first described as a mechanism.

Inexplicable sentiment

If you ask a typical yup to describe the Amsterdam housing market, he will tell you disappointed that he has already been able to walk through a house for half an hour with fifty others unsuccessfully four times before offering the same day 20% above the asking price on a house that is actually too small for its living situation. It is a summary of the vain search for a home in the city that you love. But in terms of economy it is more than that. It is a wonderful spectacle between an unprecedented demand and a limited supply. It is an ideal recipe for sky-high prices. And even though there are mores against the Mafia in the Amsterdam housing world (think of blind bidding, cash fee to the broker, making a private counter offer, assigning projects to friends) and the offer is subject to some restrictions, the market does not necessarily have the perverse traits of a monopoly. In the following four paragraphs, the degree of perfect competition is measured on the basis of four conditions: many providers, homogeneous product, equal information, maximizing self-use and no barriers or externalities. If this is met, we speak of an efficient market.

There are many selling parties on the market, ranging from private individuals to institutional parties. They are hardly able to determine the price. After all, the substitutes are present in the city. We will return to this later. Do not confuse the limited supply with the limited substitute. Despite the shortage, there are indeed many similar properties in the city. The market for unique villas has fewer substitutes.

However, there is no question of a standardized product, where the requesting party only values ​​the price. There is indeed a difference between all the houses, such as the neighborhood in which it is located, whether it has a garden or just a balcony, the floor and the bustle of the street. In a market with standardized, homogeneous products, the consumer's choice is indifferent to quality, because the quality is the same for all products. This does not apply to the housing market.