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Growing housing shortage: A Q&A on the Dutch nitrogen crisis

Economic Comment

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  • There is a growing housing shortage in the Netherlands
  • Nevertheless the number of building permits has dropped substantially
  • In part this is due to the ongoing ‘nitrogen crisis’
  • What is it, and what effect could it have on the Dutch housing market?

The daytime speed limit on Dutch motorways will go down, why?

Currently the maximum allowed speed on motorways in the Netherlands is 130 km/h (80 mp/h), but starting March motorists can expect a fine if they drive faster than 100 km/h (62 mp/h) between 6 am and 7 pm. Surprisingly though, this reduction is not motivated by road safety concerns, but rather is an emergency/stop-gap measure to reduce nitrogen emissions (e.g. NOx and NH3) in the country. By reducing those emissions the government hopes to facilitate the construction of more homes.

What’s the connection between home construction and nitrogen emissions?

According to research agency TNO, the densely populated Netherlands have the EU’s highest nitrogen emissions per square kilometre. And in May of last year, the Dutch approach to reduce those emissions was deemed not fit for purpose by the highest administrative court in the Netherlands. Projects must now demonstrate beforehand how they will compensate for their emissions. This applies to residential projects too, as some nitrogen is emitted during construction. Compensating, and proving beforehand how, is not always an easy task though. As a result, the downward trend in the number of building permits issued has accelerated.

How many homes are we talking about?

Figure 1: Building permits trending down
Figure 1: Building permits trending downSource: Statistics Netherlands (CBS)

Compared to the same period in 2018, 22% fewer building permits have been issued in the first ten months of 2019. That could mean that in the coming years home completions could drop to roughly half of what is needed to start closing the gap between demand and supply. But how far new home addition will drop exactly is difficult to predict at this moment, for two reasons. The first is that construction is also hindered by a lack of building sites and a constricted labour market, with the number of building permits already declining well before the term ‘nitrogen crisis’ started appearing in newspapers (see Figure 1). And fixing one issue won’t automatically fix the other. The second reason is that it is unclear when the emission crisis will be fully resolved. A report detailing comprehensive long-term solutions to reduce emissions isn’t expected until May. There is therefore still considerable downward room for building plans and permits.

So will lower motorway speeds free up enough emission space to build homes?

Lower motorway speeds, together with possible exceptions for smaller construction projects and different animal feed that could lower livestock’s emissions, should in theory free up enough space in the short-run to build 75,000 homes per year, which is the government’s current target. But calculations by the Dutch Institute for Public Health and the Environment (RIVM) show that lower daytime speeds in the urbanised western part of the Netherlands –where the shortage of homes is the largest- might not be sufficient, as the speed limit is already 100 km/h on many of its motorways. In practice it therefore remains to be seen if these short-term measures will indeed be effective.

What does this mean for the Dutch housing market?

ABF Research estimated a shortage of some 294,000 homes in the Netherlands (see Figure 2) and recommends building upwards of 100,000 homes per year to satisfy demand rather than just 75,000 units. So despite the upcoming speed limit reduction, the Netherlands is set to continue being plagued by a housing shortage for the years to come. Given the low unemployment rate in the Netherlands, and the declining interest rate environment, the ‘nitrogen crisis’ is another factor pushing up house prices. We expect house prices to keep rising, with a forecasted y/y rise of 4.5% in 2020. A downward risk lies in the impact of the emissions issue on the wider Dutch economy: we estimate that the nitrogen crisis will be a contributing factor to rising unemployment in 2020 and 2021, which could dampen demand for owner-occupied homes somewhat.

Figure 2: Nationwide housing shortage
Figure 2: Nationwide housing shortageSource: ABF Research
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