The delicate question of reopening schools and fixing the housing market
In the 22 February edition of BNR Nieuwsradio’s economenpanel, Professor of Public Economics at Erasmus School of Economics Bas Jacobs and chief economist at ING Marieke Blom appeared to discuss reopening education facilities and the disrupted housing market.
It has almost been a year since the first COVID-19 incident has officially been reported in the Netherlands. Not long after this event, measures were taken, and the tone in press conferences turned gloomy. Schools have long been closed, with the only exception being primary schools in some time periods and exam classes. But what are the effects of this on the economy and health in the Netherlands? In the broadcast, Jacobs advocates differentiated policy measures. His line of reasoning is as follows: considerable health gains are disputed, economic damages aren’t. According to scientific research, a closure of schools for a period of four months has a serious impact on economic growth prospects: structural damages add up to a yearly decline in GDP growth of 1.5%. The net present value of these damages turns out to be two-thirds of the Dutch GDP, which comes down to an amount of 600 billion euros. To put this astronomical number in perspective: this is more than all the aid measures taken to date. If the forecast takes conservative parameters into consideration, the damages still add up to 300 billion euros.
One might ask: how does this relate to the health gains? The gains are measured in quality-adjusted life years (QALY), which essentially are years that an individual can live in good health due to the measures. The costs of one QALY are in the current situation 1 to 2 million euros. Under normal circumstances, costs for a new medicine to enter the market and to be deemed acceptable are around 80,000 euros per QALY. The conclusion has to be that a mistake has been made; schools and universities have to be reopened instantaneously. Jacobs: ‘students and teachers are exhausted after the last year’.
No sync between supply and demand side
According to forecasts of ING and Statistics Netherlands, prices for housing are to rise in the first half of 2021. Whether this trend will persist in the second half of the year, is uncertain. ING reports a light decline; however, there are many factors that deserve consideration, but nevertheless are volatile. Prices on the housing market are dependent on the expectations and confidence of consumers. If the trend turns around, consumer expectations can have a strengthening effect. The reasoning of ING behind the forecast of a decline in prices is as follows: the housing market has become a bit less tight, owing to a decline in the amount of young people and migrants seeking to enter the housing market in the current period. The market is nevertheless strained, which makes buying a house costly and interest rates are expected to slightly rise, which results in even higher costs of acquiring real estate. This will lead to a decrease in demand. In addition, many companies are expected to default in the second half of 2021, since bankruptcies have been at an all-time low due to aid measures. Investors will therefore probably be less eager to invest in the housing market, which decreases competition.
There does seem to be consensus among economists that the housing market needs to be fixed. One of the most effective ways to realise this, is to transfer the taxing of houses to box 3, the tax bracket used to tax wealth in the Netherlands. This would be one of the many fixes needed to attain an efficient tax system. However, the opposite seems to become reality: Jacobs points to the fact that many political parties effectively seek to lower taxes on owning a house, by utilising a fictional return rate (eigenhuisforfait). Houses are a vehicle for generational and general wealth inequality. Jacobs adduces research by Piketty, showing that wealth accumulation is mostly derived from owning real estate over a period of time. Since a big part of the voting population owns a house, considering a transfer to box 3 is labeled ‘political suicide’. This is quite regrettable, since it is one of the most effective ways to tax and is hardly disruptive in the real economy. By doing this, taxes on other terrains could be lowered and the tax on own houses could be more progressive, bringing together policy ideals of both left-wing and right-wing parties.
Due to regulation and legislation, the supply of houses is very inelastic. This means that a change in prices hardly have any effect on the supply of houses, since it still is not worth it to build more houses at affordable prices. Since the rental market has maximized prices, project developers have a hard time building any profitable social housing project. According to Jacobs, the situation is very frustrating: ‘we know why the market doesn’t work. There are two ways to reach improvement of the market: we loosen price restrictions, or we have to start subsidizing building projects again. Politicians speak of “stopping market forces in the housing market”, which is strange since the housing market is heavily regulated. Supply and demand are not even close to equalizing. In the meanwhile, politicians scratch their heads every year on the question why there are way too little houses’.