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Why Living In Amsterdam Is So Expensive

Anyone who has tried to find a house in Amsterdam will have noticed that you need either a lot of money or a lot of patience. Amsterdam, like other large cities, has seen massive growth in its housing prices. Consultancy bureau KnightFrank calculated a real increase of 63.6% in the last 5 years. Considering both the rising costs of renting and owning a home, this exceeds all the other cities they looked at, deeming Amsterdam the least affordable city in the world.

The Amsterdam housing market is highly segmented. The rental market is divided into social housing and market housing. Apart from that, there are privately owned homes. Despite the segmentation, the sectors do influence each other. An increase in the prices of privately-owned homes pushes people into the market rental market, which then increases prices here. This again could lead people who live in social housing, but can afford more, not to move into a market rental or privately-owned home. This will become clear as we look at the reasons for the high housing prices.

1. Tourism

Obviously, tourists do not live in Amsterdam for a long time. However, they do have a major impact on housing prices, especially around the center. The tourism count is growing fast, reaching an estimated 23 million a year in 2025. This has led to a drastic change in the face of Amsterdam, with inhabitants of the center as the main victim.

A lot of investors saw ‘theme-park-isation’ of Amsterdam as an opportunity. They bought houses which they then (semi-)permanently rented out to tourists, squishing the housing supply for Amsterdammers. However, the current city council has, among other measures, limited the maximum amount of allowed AirBnb-nights. This could ease the pressure on areas that are heavily visited by tourists, but it will not stop the upward pressure in real estate values.2.

2. Structure of the Dutch housing market

Boring at first sight, the structure of the Dutch housing market has a significant effect on the housing prices in Amsterdam (and all over the Netherlands.) Dutch home-owners can extract the paid interest on their mortgage from their taxable income. This makes owning a home more attractive, but also increases the available funds that can be invested, which drives up prices. Mortgage interest deductions are now slowly being phased out, but their effect on the price-level will remain visible for the foreseeable future.

Dutch housing market also has a relatively small middle-income rental sector. The housing supply consists primarily of privately-owned homes and social rent, squishing middle-income rent. According to economist Josh Ryan-Collins, having little affordable rents leads to more volatility on the housing market. In countries like Germany and Switzerland, a majority of people rent their houses, which leads to less volatility in their income due to housing price shifts. The income effect of owning a home entails that homeowners consume more when housing prices increase and less when prices fall, which has a pro-cyclical effect.

Having a smaller privately-owned portion of housing also means the building sector would be relieved of some of its conjunctural strain. Due to sharp housing price decreases during last crisis, construction got to a near halt. After the crisis this resulted in a housing shortage. As the economy recovered, construction followed, creating a large shortage in construction workers and building material. The current shortages in housing are thus hard to eliminate due to constraints in the building capacity. This also applies to the building projects in Amsterdam. The current city council plans to build 52500 new houses before 2025, of which about one-third will be social housing. But there are concerns whether these targets can be met.

Amsterdam skyline

3. Investors

If we see the constant and rapid rise in housing value, it is clear why investors flock to buy Amsterdam houses as an investment object. Apart from very volatile cryptocurrency, there are not a lot of investments that yield this kind of return. That is, of course, assuming housing prices will keep on rising, which is highly unlikely. The rush to invest in Amsterdam was intensified by the low interest rates during the last financial crisis. People with cash went looking for high-yielding assets instead of the near-zero interest rate they got on bonds or while saving. Buying a home, to later rent out or sell again, seemed a good idea to many who had some cash to spend.

This led to a large amount of houses being accumulated by a small amount of people and investment firms. At this point, 1 in 5 houses in Amsterdam is bought by an investor. Also, of the 20 billion traded in real estate in the Netherlands, more than half was in the Amsterdam region. This leads to fears for the financial stability. The massive flows of capital and the seeming believe that prices will keep on rising show similarities to the buildup of the US financial crisis of 2008.

Growing demand has increased housing prices spectacularly, pushing out most buyers with median incomes. To tackle this, proposals have been made to increase the transfer tax on real estate for investors. This should disincentivize investors to buy Amsterdam real-estate and improve private buyers’ chances.

4. Social housing is clogged

In Amsterdam, almost half of all houses are social rental, yet still there are shortages and long waiting lists to get a social rental house. One reason is that a lot of people keep living in social rental houses after their income surpassed the threshold. They are called ‘scheefhuurders (skewed renters), and although their rents are allowed to increase, they can’t be kicked out. These scheefhuurders mostly have middle incomes, and because there is a shortage in housing for their income category in Amsterdam, many of them do not have a choice but to stay in their social rental home.

Another reason is the liberalization of the rental market. This allows housing corporations (the organizations that rent out and manage social houses) to increase the rent of former social rental houses to whichever level they like once the old owner leaves and it’s rental-value exceeds 710 euros. Not only does this affect lower-income tenants, it also incentivizes scheefhuurders to remain in their controlled-rent homes. Also, as affordable housing becomes less affordable, market rental rates will, as a substitution effect, increase.

During the crisis, the central government also raised a tax on social rental homes (De verhuurdersheffing) which must be paid by housing corporations. They pay for this by both raising rents and selling houses. This has led to steady decrease in the stock of social rental houses. It is now not only hard to get an affordable home, but it also gets increasingly more expensive. These effects are felt particularly hard in Amsterdam, due to its large stock of social housing.

As you can see, the Amsterdam housing market has quite some structural problems. Social housing is getting less affordable, buying a home is near-impossible as housing prices are sky-rocketing, and affordable free sector rent is vastly undersupplied. The current city council is determined to act, but Amsterdam’s housing problem will take a long time to solve.


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