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.