Cutting Mortgage Interest Deductions Could Cool Dutch Home Prices, OECD Says

Cutting Mortgage Interest Deductions Could Cool Dutch Home Prices, OECD Says

A recent report by the Organization for Economic Cooperation and Development (OECD) has put the spotlight on one of the most generous homeownership incentives in Europe: the mortgage interest deduction (MID). According to the OECD, this tax break is a major driver of soaring house prices and growing inequality in the Dutch housing market. The international body argues that carefully scaling back this deduction—especially for higher-income households—could reduce borrowing capacity, curb overbidding, and ultimately bring prices down to more affordable levels.

Understanding Mortgage Interest Deduction in the Netherlands

In the Netherlands, homeowners can deduct the interest they pay on their mortgage from their taxable income. This policy effectively lowers monthly housing costs and makes homeownership an attractive investment. However, it also inflates buyers’ budgets, pushes up demand, and contributes to intense competition for limited housing stock.

The OECD notes that this system, combined with low taxation of imputed rent (the notional income homeowners ‘earn’ by living in their own property) and exemptions from capital gains tax, creates a potent subsidy. On average, Dutch homeowners benefit more from these combined incentives than in any other European country.

Key Findings from the OECD Report

In its 2025 Economic Survey of the Netherlands, the OECD highlighted several critical points:

• Generous mortgage interest deductions and low imputed rent taxes are among the main causes of elevated home prices.
• State guarantees (via the National Mortgage Guarantee, or NHG) and reduced transfer taxes further stimulate demand, leading sellers to bake these advantages into their asking prices.
• The cumulative effect of these policies has widened wealth inequalities, as higher-income households reap disproportionate benefits.
• A gradual, well-communicated phase-out of the deduction, starting with the top income brackets, could lower peak prices without shocking the market.

By reducing borrowing capacity, the OECD argues, households would bid more conservatively—limiting overbidding and speculative buying.

Learning from the Danish Example

Denmark provides a useful model for targeted reform. There, mortgage interest deductions vary according to the homeowner’s income level and, in some cases, the value of the property. High-value homes or high-income borrowers receive reduced tax relief, while lower-income households retain more generous deductions.

This tiered approach helps cushion the impact on first-time buyers and middle-income families, while removing a significant subsidy for investors and second-home buyers. The Danish experience shows that tailoring incentives can support affordability goals without triggering a sudden market downturn.

Other Drivers of High Home Prices

Beyond tax incentives, several regulations have inflated home prices in the Netherlands:

• National Mortgage Guarantee (NHG): This government-backed guarantee lowers lender risk, enabling banks to offer mortgages with higher loan-to-value ratios. As a result, buyers can borrow more against the same property, pushing up prices.
• Reduced Transfer Tax: First-time buyers enjoy a lower transfer tax rate, which encourages home purchases but also raises demand among entry-level buyers.
• Housing Shortage: A persistent deficit of available homes, particularly in urban centres like Amsterdam, Utrecht, and The Hague, remains the root cause of high prices. Without a significant increase in supply, structural subsidies will continue to exert upward pressure on the market.

Balancing Reform and Market Stability

The OECD cautions that the Dutch housing market is highly regulated and complex. Any reform will create winners and losers, so policymakers must plan carefully:

1. Gradual Implementation: Phasing in limits on deductions—starting with top earners—minimises disruptive effects.
2. Clear Communication: Explaining the rationale behind changes helps build public support and prevents market panic.
3. Supporting Supply Growth: Parallel efforts to speed up planning procedures, incentivise social housing (via woningcorporaties), and invest in new construction are essential.

By combining targeted tax reforms with supply-side measures, the government can address affordability without sacrificing market stability.

Toward a More Affordable Housing Market

The OECD’s recommendations align with broader calls for sustainable, long-term housing policies. Cutting back mortgage interest deductions alone won’t solve the affordability crisis, but it can be a powerful tool in a balanced policy mix.

Increasing housing supply, investing in public and social housing, and streamlining regulations will all play vital roles. At the same time, a reformed MID system can dampen speculative demand and reduce wealth inequality among homeowners.

Conclusion

The OECD report makes it clear: to tame exorbitant home prices and curb inequality, the Netherlands must rethink its generous mortgage interest deduction. Adopting a tiered, phased approach—similar to Denmark—and pairing it with efforts to boost housing supply could lead to a more stable and affordable market for all.

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