Why Phasing Out Mortgage Interest Deduction Won’t Crash Dutch House Prices, Says IMF

Why Phasing Out Mortgage Interest Deduction Won’t Crash Dutch House Prices, Says IMF

The International Monetary Fund (IMF) has long highlighted the distortive impact of the mortgage interest deduction—known in Dutch as hypotheekrenteaftrek—on home prices in the Netherlands. At the IMF’s annual meeting in Washington, Marnix van Rij, the fund’s Dutch director, argued that scrapping this tax benefit won’t trigger a sudden housing crash if it’s done gradually and paired with measures to expand supply. Instead of a shock to homeowner wealth, a phased approach could gently ease price pressure while freeing up billions in public revenues.

What Is the Mortgage Interest Deduction?

The mortgage interest deduction allows Dutch homeowners to deduct the interest paid on their mortgage from their taxable income. Introduced in the 1980s to stimulate homeownership, it became one of the most generous homeowner subsidies in Europe. Critics say it inflates property values by artificially boosting buyers’ borrowing capacity, making it harder for first-time buyers and renters to enter the market.

Historical Evolution and Current Regime

Since 2001, successive governments have trimmed the deduction by reducing the maximum tax rate at which interest can be reclaimed. What once allowed high-earning homeowners to deduct interest at 52% has now been gradually brought down to 40%. Despite these cuts, the core principle remains intact, and annual fiscal costs still exceed €10 billion. Political consensus to abolish it entirely has never materialised—until now.

IMF’s Gradual Phase-Out Approach

Marnix van Rij emphasises that timing is critical. “You have to see it in the bigger picture. Of course, you also have to address the supply,” he said in Washington. The IMF recommends:

• A multi-decade phase-out rather than a one-off abolition.
• Reinvestment of fiscal savings into housing supply and targeted tax relief.
• Coordination with municipal and national housing strategies to accelerate new construction.

By extending the phase-out over, say, 20–30 years, the shock to monthly budgets remains modest. This gradual path contrasts with abrupt policy reversals that could erode homeowner wealth and consumer confidence.

Potential Impact on Prices and Homeowner Wealth

Former De Nederlandsche Bank chief economist Job Swank estimated that eliminating the deduction for new loans overnight could reduce house prices by up to 30% over a decade. However, Van Rij points out that “virtually no one in politics supports this scenario.” A protracted phase-out is likely to moderate price growth by several percentage points annually, rather than triggering a steep decline.

Existing homeowners would see slower equity appreciation, but they would still benefit from long-term price gains. Meanwhile, younger buyers and renters—the most price-sensitive groups—could face a fairer market as artificial price inflation eases.

Political Proposals and Phase-Out Timelines

The current Dutch election season has brought unprecedented momentum to the debate. Several parties now include full abolition in their manifestos, though they differ on the withdrawal schedule:

• Some smaller parties propose a 10-year sunset.
• Centrist coalitions favour 20–30 years.
• Others link the phase-out to annual housing targets.

Differences in timelines matter. A shorter horizon increases the annual fiscal burden on homeowners, while a longer horizon dilutes the impact and provides more breathing room for market adjustment.

Reinvesting Proceeds to Support Homeowners and Supply

Phasing out the deduction could free up an estimated €11 billion annually. The IMF suggests these funds be earmarked for:

• Expanding social and affordable housing construction
• Strengthening rent subsidies (huurtoeslag) for low-income tenants
• Lowering other tax rates to offset higher mortgage costs

Redistributing fiscal gains in this way can help cushion households from higher monthly payments and simultaneously tackle the Netherlands’ acute housing shortage.

Striking a Balance in the Dutch Housing Market

A successful transition away from the mortgage interest deduction hinges on a two-pronged strategy:

1. Supply-side action: Speeding up permits, boosting public construction, and incentivising private developers.
2. Demand-side support: Timely tax relief and targeted subsidies for vulnerable groups.

Only by coupling tax reform with a robust pipeline of new homes can policymakers ensure access and affordability for all—renters and buyers alike.

Conclusion

The IMF’s message is clear: scrapping the mortgage interest deduction doesn’t have to precipitate a housing crash. If designed as a gradual, multi-decade process and combined with concerted efforts to increase supply, the policy shift can stabilise prices without undermining homeowner wealth. Redirecting tax savings into housing and broader fiscal relief will help maintain market confidence and promote equitable access.

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