People are not using the value of their homes as a way to save, according to new analysis of Dutch data. The research by Eduard Suari-Andreu, to be presented at the Royal Economic Society''s 2015 annual conference, shows that despite a 20% decline in house prices between 2008 and 2013, Dutch people have not increased other types of saving.
Since a house is a long-term investment, many people view it as an asset that is an alternative to a pension: it locks up their savings and can be sold in old age. If this is true, when the value of our house declines, we should increase other household savings to compensate.
But the new research, based on survey data that captures both active savings (how much money we put away in a year) and passive savings (a change in financial wealth) shows no link. This applies both for self-reported house prices – our perception of the value of the home – and a measure provided by Statistic Netherlands, the Dutch statistical office.
There is not even a relationship among those close to retirement, who are most affected by declines in house prices. This suggests that households do not consciously use a house as an instrument to save for retirement.
The author comments:
''There are two implications for the Dutch government. The first is to be moderate with measures that encourage home ownership, such as the tax deduction of mortgage interest payments.
''The second is to increase awareness of the relevance of housing as an instrument that can be used to complement retirement income.''
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In the years following the outbreak of the recent global financial crisis, there have been declines in house prices throughout several developed countries. The Netherlands provides a very clear example. The Dutch housing market has experienced a decline in prices of 20% between 2008 and 2013.
Standard economic theory suggests that households may use housing assets as a savings instrument. Since a house is bought usually thinking in the long term, households may view it as an asset that can be sold and used to complement retirement. This behaviour might be even more popular nowadays due to uncertainty in future pensions. According to this view, a decrease in the price of houses should imply an increase in household savings.
In line with the standard theory, previous economic literature has provided evidence suggesting that house prices have a negative effect on savings. But the results are rather mixed and there is no study so far that uses a good measure of active savings by households. Previous studies are not able to disentangle passive savings (which derive from capital gains or losses) from active savings (which derive from the willingness of households to add money to their stock of savings).
By employing high quality survey data, this study is able to use several measures of savings. One is a measure of active savings, obtained by asking respondents how much money they have put aside in a given year; and the research uses the change in financial wealth for the sake of comparison with previous literature. In addition it uses several measures of the change in house prices, employing self-reported house prices and a measure provided by Statistic Netherlands, the Dutch statistical office.
Controlling for a series of economic and demographic variables at the household level, the results show that there is no significant effect of house prices on household savings. This result holds when using different measures of house prices and of savings. It suggests that households do not consciously use the house as an instrument to save for retirement. According to the standard theory, those closer to retirement should be more affected. But there is no effect for that particular group of households.
The result of the empirical analysis implies that Dutch homeowners have taken a considerable loss, since the price of their house has declined on average by 20% since 2008. This decline has not been offset by an increase in any other kind of long-term savings.
Given this result, there are two implications for the Dutch government. The first is to be moderate with measures that encourage home ownership, such as the tax deduction of mortgage interest payments. The second is to increase awareness of the relevance of housing as an instrument that can be used to complement retirement income.
The Effect of Declining House Prices on Household Savings: The Dutch Case -Eduard Suari-Andreu, University of Groningen (The Netherlands)
