Too soon to celebrate growth of mid-market rental in the Netherlands

Since 2013, the Dutch government has tried to increase the mid-market rental segment, with the help of, among others, private and institutional investors. In this Housing Market Bulletin we describe the developments of the mid-market rental segment between 2012 and 2018 using data of the cross-sectional Netherlands’ Housing Survey (WoON).

For those who follow the news about the Dutch housing market, it will come as no surprise: there are major and increasing concerns about the liberalized rental sector in the Netherlands. This sector is very small due to the lack of housing subsidies. In 2018, only 7 percent of all homes belonged to the liberalized rental sector.[1] The lack of liberalized rental homes, and especially the lack of affordable liberalized rental homes (the so-called mid-market rental homes, with monthly rents between EUR 720-1,000) is considered to be problematic for the functioning of the housing market. It reduces residential mobility, results in suboptimal outcomes and affects labor mobility too. The lack of rental homes in the mid-market rental segment is also considered to be problematic for households with a middle income that are not eligible for a social rental home and have insufficient means to buy a home.

[1] Homes with a rental price above the liberalization threshold level (in 2019: 720.42 euro) belong to the liberalized rental sector. Whereas households in the owner-occupied sector benefit from the mortgage interest deduction and households in the social (regulated) rental sector benefit from housing allowances and below market rent-levels (the implicit subsidy), the liberalized rental sector is marked by the absence of housing subsidies.

The amount of mid-market rental homes grew considerably in recent years (Figure 1).[2] In 2012, the Dutch housing stock contained only 227,000 mid-market rental homes. Six years later, the mid-market rental segment had almost doubled, with a total of 420,000 homes in 2018. The amount of mid-market rental homes grew slightly faster in the four major cities in the Netherlands (in Dutch: ‘G4’, comprising of Amsterdam, Rotterdam, The Hague and Utrecht), than in the rest of the country.

[2] The mid-market rental segment comprises all homes with a monthly rental price between the liberalization threshold level (a level that is set annually by the national government, see also footnote 1) and an upper limit of 1,000 euros (for WoON 2018). For this research, we adjusted the upper limit of 1,000 euro for inflation with the Harmonised Index of Consumer Prices (HICP)-indicator of Statistics Netherlands (2015 = 100). In 2012, the mid-market rental segment included rental homes with a rental price between 652.52 euros and 930.18 euros and in 2015 rental homes with a rental price between 699.48 euros and 984.12 euros. In the WoON 2018, the mid-market rental segment refers to rental properties with a rent between 710.68 euros and 1,000 euros.

There are four main categories of landlords in the Netherlands who are renting out mid-market rental homes. Housing associations (social landlords) have increasingly focused on their core task since 2015 (i.e. renting out social, regulated rental homes to lower income households), but they are still the largest player in the mid-market rental segment. In 2018, about 37 percent of all mid-market rental homes were rented out by a housing association, which is comparable to 2012 (Figure 2). Slightly less than a quarter of all mid-market rental homes were rented out by a private landlord (a private person or family). Another 22 percent were rented out by an institutional landlord. A fourth category of ‘other’ landlords is formed by a mixed group varying from care institutions to national government.

The mid-market rental segment has mainly grown at the expense of two other housing segments: the social rental sector and/or the owner-occupied sector. In 2018, only 11 percent of all mid-market rental homes were built in 2012 or later (Table 1). In absolute numbers, this equals around 45,000 homes. Slightly less than a quarter of the total mid-market rental growth between 2012 and 2018 can be traced back to the construction of new homes since 2012. The mid-market rental segment has therefore mainly grown due to changes in other segments of the housing market.

It seems particularly likely that the mid-market rental segment has grown at the expense of the owner-occupied sector. A recent study by the Dutch Land Registry shows that increasing numbers of owner-occupied homes transferred to the private rental sector in recent years. Within the total number of sales, the importance of buy-to-let is also increasing. Of all homes that were sold in 2017, one out of twenty was bought by a private landlord. The rise of buy-to-let (due in part to historically low interest rates) means a greater supply of rental homes, but also fewer opportunities for households preferring to buy a home. This might be the case in particular for households looking to buy a small apartment, because this segment is particularly popular among private investors.

On top of the fact that buy-to-let has resulted in a larger total private rental sector, private landlords were one of the drivers behind the mid-market rental growth between 2015 and 2018. In this period, the mid-market rental segment grew by just under 91,000 rental properties. Around one third of this growth can be traced back to private landlords. Housing corporations accounted for more than 23 percent of the growth. Unlike private landlords, institutional landlords barely contributed to the growth of the mid-market rental sector.

A larger mid-market rental segment is necessary to improve the functioning of the housing market. It is uncertain however, whether the housing market is functioning better due to the recent growth in the amount of mid-market rental homes. Firstly, the average rental price for new tenants is close to the mid-rental ceiling of 1,000 euros (Figure 3). It is highly unlikely that homes in the mid-market rental segment are affordable for households with a middle income (and especially for those with a lower middle income), given their financial means and accounting for other necessary expenses for daily living.

Secondly, and more importantly, the mid-market rental segment has grown at the expense of the owner-occupied sector, probably due to buy-to-let practices. This has made owner-occupied homes scarcer, resulting in upward price pressure. Furthermore, if those private investors (buy-to-let landlords) have a relatively short investment horizon, the growth of the mid-market rental segment brings additional risks. Once interest rates start rising again or house prices start declining, other investments will become more attractive, increasing the chance that buy-to-let demand will (partly) fall. Given the increasing market share of private landlords in the total number of sales, the decline in demand could put downward pressure on house prices. All in all, it seems too soon to celebrate the growth in the numbers of mid-market rental homes.

As described in our Housing Market Bulletin ‘New policies for the Dutch housing market?’ (April 4, 2019), there are plans to introduce an emergency stop for the liberalized rental sector in order to stimulate the growth of the mid-market rental segment. This will give municipalities the possibility to take temporary, local action to restrict the initial maximum rental price in the liberalized rental sector to prevent exorbitant rents and to improve the housing market position of middle-income households.

However, regulating the liberalized rental sector is not a structural solution for the problems in the liberalized rental sector. The only reason why private landlords can demand high rents is the lack of housing supply. The prime solution must therefore be sought in increasing the construction of new homes. More supply will eventually lead to more balanced rental (and housing) prices, which will strengthen the position of middle-income households on the housing market.