Ripple effect of Amsterdam house prices

The price of houses in Amsterdam, whether rising or falling, influences house prices in a large part of the Netherlands. This is an important result of Alfred Teye's PhD research because insight into house price developments and risks in the housing market is crucial for society.

The rate of home-ownership has increased substantially in recent decades, in part due to the government encouraging people to buy their own homes. Owning your own home is seen as an investment for the future as, generally speaking, house prices tend to rise. However, house prices can fall in the short term, forming a risk for housing equity. This was particularly noticeable in the last financial crisis of 2007-2008, when falling house prices resulted in negative equity for many recent home buyers. Meanwhile, house prices are rising again in many parts of the Netherlands.

House prices and risks

Since the crisis in 2007-2008 it has become clear that a better understanding of the spatial diffusion of house prices and house price risks is crucial, as the housing market is of great importance for the economy. The shift in house prices is also crucial for the development of equity for individual households and thus also for their financial buffer. For this reason insight into risks associated with house prices as well as instruments for limiting risks is extraordinarily relevant. OTB doctoral candidate Alfred Larm Teye offers insight into this material with mathematical methods that are being used in housing market research for the first time.

House price developments connected together

Alfred Teye investigated the spatial dynamics of house prices in the Netherlands: how do house prices in one region affect the house prices in other regions, temporarily or permanently? And what role do house price developments in Amsterdam in particular play in the development of house prices elsewhere in the Netherlands? Teye: “We see that house price developments in the Netherlands are connected together. Predominately in the provinces of Noord-Holland and Drenthe, there is a ripple effect that spreads to the surrounding regional housing markets. House prices in Amsterdam in particular influence house prices in all Dutch provinces except for Zeeland. If house prices rise in Amsterdam, they rise in the other provinces, except for Zeeland, and the same is true of falling house prices in the capital. This mechanism is most evident in the province of Utrecht.” A possible explanation is that people move out of the overheated housing market of Amsterdam, where house prices are going through the roof, to smaller towns and cities in the surrounding areas. This areas develop, so that house prices rise there as well.

Home-value insurance schemes useful if adapted

Teye also investigated how the efficiency and loss cover of a home-value insurance could be improved, were it to be introduced in the Netherlands. A home-value insurance is based on a property price index and is intended to reduce the risk of decrease in value. But this type of insurance does not always cover the loss, because the decrease in value of an individual house may be greater than the average decrease according to the property price index. Teye: “We have seen that the efficiency of this insurance can be improved. Up to now, there has been a 45% chance that house owners in other countries get their losses paid out. The risk is highest for one-family dwellings, followed by apartments with no more than three bedrooms. The risk is lowest for apartments with more than three bedrooms. The cover is also only around 15%, which means that a large proportion of the risk is not covered.” Teye recommends that policies should be adjusted in order to lessen large individual house-price risks. He explains: “The risk cannot be completely covered, but it is certainly possible to reduce the remaining risk by 70%. This adjusted insurance also has a limit on how much it pays out if a house is sold at a loss, to prevent homeowners carrying out less maintenance. It is important that the government and insurance companies work together to encourage homeowners to carry out a certain minimum level of maintenance.”

Teye, A. (2018). Diffusion and Risks of House Prices in the Netherlands. A+BE | Architecture And The Built Environment, (3), 1-128. doi:10.7480/abe.2018.3