The Netherlands—The most debt-burdened households in the euro zone aren't in Portugal, Ireland or Greece. Spanish households—which borrowed heavily in the boom years to build and buy houses—aren't even close to the top.
The title of most indebted goes to households in the Netherlands, and the main reason is the enormous mortgages that the Dutch—though frugal by reputation—take out.
While the Dutch government has been an enforcer of fiscal orthodoxy throughout the European debt crisis, seeking budget cuts from governments across the euro zone, household debt is a persistent worry for Dutch regulators, who see it as a major risk for the economy.
In the boom years, Dutch banks routinely wrote mortgages that exceeded 125% of the value of a home—covering closing costs, taxes, renovations and even new-car purchases on the side. Though low unemployment means most Dutch are still able to pay their mortgages, a significant drop in house prices, a rise in interest rates or an increase in unemployment would leave more people unable to pay their debts, with effects that could ripple through the financial system and the broader euro-zone economy.
"This debt makes the economy much more vulnerable to shocks in the housing market, interest rates and employment," says Gerbert Hebbink, senior economist at the Dutch National Bank. "From a financial stability perspective, we think the mortgage loan-to-value ratios are too high."
The Netherlands' large current-account surplus, at nearly 8% of GDP, and relatively low public debt, at 64% of GDP, could help absorb the shock to consumption if Dutch households face a credit squeeze. But the euro zone's tight fiscal rules and the reluctance of the European Central Bank to embark on more expansionary policy mean there won't be much stimulus from euro-zone authorities to boost demand when households start deleveraging.
In an interview in Washington on Tuesday, Dutch Prime Minister Mark Rutte dismissed worries about the Netherlands' mortgage debt. "It's not a big issue…if you look at the whole picture," he said, noting that the Dutch have saved as much in their pension funds as they have in mortgage debt—"and we have huge private savings."
The U.S. and Europe have spent much of the crisis coping with the hangover from a decadelong borrowing binge. Greece is a cautionary tale for excessive government borrowing. But the debt problems of Ireland, Spain, the U.K. and the U.S. are largely the result of popped real-estate bubbles.
Dutch households have borrowed more than their counterparts in any of these countries. In 2010, household debt in the Netherlands was more than 240% of disposable income, according to European Union statistics agency Eurostat—one of the highest levels of any advanced economy and easily the highest in the euro zone. In 1999, the figure was 140%. In the entire EU, only Danish households have more debt.
Similar factors have boosted debt levels in the Netherlands and Denmark, which isn't a member of the euro zone. In both countries, interest-only mortgages have proliferated, taking advantage of laws that allow tax deductions for interest payments. But that means less principal has been repaid. Real-estate prices in both nations have soared faster than disposable income over the past decade, and banks have been willing to lend larger and larger sums to support those prices.
The Netherlands arguably has a bigger problem. Danish law limits mortgages to 80% the value of a home, well below the typical size of a Dutch mortgage.
"This isn't public-sector debt. It's private-sector debt—but it's equally excessive," says William Xu-Doeve, a Dutch economic consultant.
That wouldn't be a problem if Dutch house prices were rising. But the market has stalled since August 2008.
Hank Ydema, a 51-year-old freelance writer, and his wife bought a house in 1996 in the Amsterdam suburb of Almere, a town built on land reclaimed from the sea to make room for the region's burgeoning postwar population.
They sold that house in 2003 for €190,000 (about $255,000), a 60% gain, and took out a €330,000 mortgage to buy a larger, three-bedroom house nearby. Now they are going through an amicable divorce and are trying to sell the house.
Almere's manicured suburban streets, lined with cookie-cutter houses, are dotted with for-sale signs. Although the crisis hasn't forced a lot of sales, it takes longer now to sell a house. The Ydemas' house has been for sale since June for €290,000. They have had many visitors but no buyers.
The Ydemas have paid down about a fifth of the principal on their mortgage. But interest-only mortgages are common here, so it isn't unusual for people to put their houses up for sale with principal completely unpaid.
"Those families have got a real problem," Mr. Ydema said. "We can sell, and in our situation we have to sell. My wife would like to stay in the house, but with her income she can't afford it. The same for me."
Economists lay part of the blame for the Netherlands' high household debt levels on the tax deduction for mortgage interest. The policy, similar to that in the U.S., inflates real-estate values, many economists say, and encourages households to take on more debt than they can handle. It favors the rich, who are more likely to own homes and have higher tax burdens that are lightened by the deduction; and biases banks toward financing home sales and away from lending for more productive investments.
The International Monetary Fund, in its annual report on the Dutch economy released in June, recommended a phaseout of the deduction that would leave existing mortgages unaffected. But the Dutch governing coalition has pledged to leave the deduction in place.
Even without it, Dutch mortgages would be large, economists note, because housing here is expensive. The country is one of the most densely populated in the world. Open space is seen as a precious commodity, and the government closely controls all construction to prevent sprawl.
That means housing supply isn't very responsive to house prices. Municipal authorities, not market forces, control how, when and where housing is built.
Government planning is evident here in Almere, one of the few places in the Netherlands where lots of new housing has been built in recent decades. The city is divided into tidy wijks, or districts, whose street names share whimsical, easy-to-remember themes. There is "Danswijk," with streets named after the tango and the salsa. Mr. Ydema lives in Filmwijk (there is an "Empire Strikes Backstraat").
Almere has been a magnet for first-time buyers. But banks, under pressure from authorities, have tightened lending standards, and sellers don't want to lower prices further. That has left many younger buyers locked out of the market.
"The current level of house prices is on the edge of what is affordable, considering that there is a generational effect in the housing market," said Mr. Xu-Doeve, the economic consultant.
A key question now is what will happen to the housing market. Housing prices were down nearly 9% nationwide in August from August 2008, according to the Dutch statistics agency. That is significant but still far less than the double-digit declines over the same period in the U.S., Spain, Ireland and the U.K.
Dutch unemployment—at 4.3%, the euro zone's lowest—has a lot to do with this, experts say. Job losses haven't turned homeowners into forced sellers.
"That situation seems far away at the moment," said Jan Rouwendal, an economist at the Free University Amsterdam, "although we know things can change rapidly."
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