Reducing VAT to 9 per cent could prevent collapse in construction of affordable rental homes in the Netherlands

8 juni 2022

The housing shortage in the Netherlands will grow explosively in the coming years as a result of the lapse in building output, the expected reduction in building permits issued in 2022, and the continued growth in the number of households. Combined with recent government measures targeting the housing market, this will inevitably result in a drop in the total rental housing stock. The shortage may amount to up to tens of thousands of homes per year. Measures must be taken immediately to keep the building output on track. Reducing the VAT for regulated and medium-priced rental homes to 9% could spark a positive trend before the end of 2022. Research by Capital Value shows that there are enough construction plans in place and that housing associations and pension funds still possess sufficient financial resources to invest in affordable rental homes. 

Construction of more than 25,000 homes postponed
Previous research by Capital Value among property developers, investors and housing associations (March) already showed that the construction of up to 25,000 homes is being postponed due to an increase in construction costs, the uncertainty surrounding the so-called "Ukraine clause" and an interest rate increase. Many of these delays concern affordable rental homes, which are no longer feasible under the current market conditions. Capital Value anticipates that this number will only increase if no measures are taken.

Number of building permits may drop to 55,000 in 2022
The number of building permits for homes issued in the first quarter of 2022 was approximately 13% lower than in 2021. The consequences of the war in Ukraine are not yet visible in these figures, and the number of issued permits is expected to continue to fall in the coming months as increasing numbers of construction projects are deemed unfeasible. The total number of building permits issued in 2022 may ultimately prove as low as 55,000, a level comparable to that of 2015-2016. This will inevitably result in a reduced building output approximately one or two years from now.

Potential increase of housing shortage up to 350,000-400,000
With a housing shortage of nearly 279,000 homes (3.5% of the total stock), the current pressure on the Dutch housing market is unprecedented. In February, based on estimates by ABF Research and Capital Value, the shortage was predicted to increase to 316,000 by 2024. The potential delay in the construction of 25,000 or more homes will significantly increase this number, and there have been signs in the past few weeks that steadily more construction projects are being put on hold. If the declining trend in issued building permits becomes entrenched and the number of households continues to grow, the housing shortage may reach 350,000 to 400,000 in the coming years.

VAT reduction to 9% may prevent collapse
One solution to help stimulate the construction of regulated and medium-priced rental homes would be to reduce the VAT rate to 9%.

"Based on European regulations, member states are allowed to set reduced VAT rates for the construction, renovation and conversion of housing that is provided in the context of social policy," says Gerton Rademaker, tax consultant and partner at Dirkzwager. "This measure must relate to social policy or public housing, however. Legal precedent established by the European Court of Justice shows that the actual implementation of this policy will be determined by political choices that, in principle, will not be reviewed by the European Union. Furthermore, if a reduced VAT rate is indeed introduced, the various aspects of implementation must be considered carefully and measures must be taken to prevent abuse. One such measure could be to set a minimum period for the letting of regulated rental homes. Should a rental home no longer be let in accordance with rent regulations before the end of that period, all or part of the VAT difference would need to be paid back.
"A minimum term of 10 years, for example, would be a good fit with the current periodic adjustment scheme for immovable property. Because most municipalities have already established a minimum term of 20 years for the construction of regulated and medium-priced rental homes, this condition would not create any problems in practice. Drafting a bill for such a VAT reduction in the immediate future would be very welcome, though such a bill must of course take into account the aforementioned points."

Marijn Snijders, director of Capital Value, explains: "Pension funds and housing associations have sufficient capital at their disposal to invest in affordable rental homes. It is therefore essential to ensure, together, that the available capital can in fact be put to such use. A VAT reduction would present a solution for projects that have been brought to a halt by the current market situation. We must also be careful to avoid an overload of new regulations that makes building affordable rental homes impossible under the current market conditions. Practically all large municipalities have regulations for new-build regulated and medium-priced rental homes, and the recently announced national legislation for the regulation of the free market may end up working at cross purposes with these municipal regulations."

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