Housing Consumption and Financial Policy Instruments in the Netherlands

Reforming the system of financial instruments on the housing market is a recurring issue. This paper constructs a model explaining household behaviour, in particular the effects of prices and income on the tenure choice and the level of housing consumption. It analyses the effects that may be expected of fundamental changes of financial policy instruments in the Netherlands: (1) a conversion of below market rents to market rent levels; (2) a switch from the current fiscal system for owner-occupiers to a general lump sum tax reduction; and (3) a combination of these measures. The results indicate that the initial disadvantageous effects on the housing costs are large, but the behavioural response of households and the expected changes of price levels considerably reduce or even eliminate longrun effects. Since the effects may be substantial for individual households, a well-considered transition path, as is done in other countries, should be used.