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House prices at the border

2014-11-27 08:51:32

Staying Dutch

Nov 26th 2014, 15:55 by THE DATA TEAM

IT IS tempting for economists to couch Europe s great debates over immigration,

burden-sharing, competitiveness in technocratic terms. What effect do new

arrivals have on the wages of the local population? How can debts be mutualised

without giving debtor countries an incentive to spend wildly? But cold logic

fails to capture the emotional side to issues that directly touch on

sovereignty and national identity. A new Tinbergen Institute paper is a

reminder of how cultural differences can run counter to the logic of European

integration.

The authors were intrigued by the difference in the behaviour of house prices

between the Netherlands and Germany. Between 1985 and 2013 German house prices

were tepid in comparison with those next door: Dutch house prices virtually

tripled in real terms between 1985 and 2008, before declining sharply. These

variations have several causes: German housing supply is more responsive than

Dutch supply; the German rental market is far more developed; mortgage-interest

payments are tax-deductible on the orange side of the countries shared 500km

border, and not in Germany.

For the rational-minded, gaps this wide raise questions. If it is far cheaper

to buy a house in Germany, shouldn t the Dutch take advantage and purchase

property there? That would narrow the price gap between the two countries. And

shouldn t the case for this sort of arbitrage be particularly compelling closer

to the border, where the trade-off between an extra few minutes on the daily

commute and paying a lot less for a house makes most sense? After all, the two

countries are both part of the Schengen area, which makes it easy to zip

between them; and Dutch citizens who live in Germany but work at home can still

opt to pay Dutch income tax, mortgage-interest deductibility and all.

Sure enough, the authors do find that prices behave differently close to the

border (see chart). There was a smaller run-up in prices for Dutch houses close

to the frontier with Germany than for those further away from it; and the gap

between the two sets of prices widened after 2000. That suggests there was

greater downward pressure on Dutch prices at the border, during a time when net

migration from the Netherlands to Germany jumped. It looks like a victory for

the theory of efficient markets.

Not so fast. The fact remains that there is still a very sharp jump at the

border, which the researchers cannot explain away through different standards

of accommodation. On average houses within five kilometres of the Dutch-German

border are about 23,000 pricier in the Netherlands than in Germany (even

though Dutch houses are slightly smaller). When the researchers controlled for

differences in housing quality, they identified a drop of 16% in asking-prices

at the border with Germany. The actual gap is bigger still: the evidence

suggests that thrifty German buyers achieve a much bigger discount on the

asking-price than the Dutch.

The researchers speculate that this premium of as much as 26%, they estimate

is what the Dutch are willing to pay to live in their own country. That may be

overdoing it there are transaction costs associated with moving, and rising

prices can be a signal to buy for those people who see their house as an

investment. But it surely contains an element of truth: people attach a value

to being among their own kind. That value informs not just Dutch house prices

but much bigger debates, too.