As of the first of January 2021, investors who buy a house in the Netherlands that will not be their primary residency have to pay a higher transfer tax of 8% (up from 2%) on the purchase price of the house. This will impact people wanting to buy a home for their children, people buying a holiday home and buy-to-let (BTL) investors.

The housing shortage in the Netherlands has been a growing problem over the past years and the government has been looking for ways, other than building more houses, to lower the pressure on the market. Many people believe that the inflow of BTL investors to the Dutch housing market, primarily in the private rental sector, is causing the market to become even tighter than it already is. Therefore, measures such as the increased transfer tax are put in place to disadvantage BTL investors while supporting ‘regular buyers’ when they are competing for the same house.

While it is true that in a tight market additional inflow of BTL investors will tighten the market even more, the importance of the private rental sector should not be overlooked. According to Klaas Knot, head of the Dutch central bank (DNB), the private rental sector is important for a healthy housing market. The private rental sector can take pressure away from the social rental sector as people that see their income grow, move to the private rental segment to make room in the social rental market. It can also accommodate people that are unable to buy a house but have an income that is too high to be eligible for the social rental sector.

Over the past decades, the Netherlands has seen its private rental sector shrink and rental prices increase, as can be seen in Figure 1. Due to the COVID-19 pandemic, demand from expat workers decreased as many expat workers moved back to their home country and no new expat workers moved to the Netherlands. This temporarily took away some pressure from the private rental market, leading to lower prices. It is believed that this is only a temporary effect. As the economy opens again, it is likely that demand from expat workers will increase again. This will in turn put more strain on the market again and potentially increase prices again.

Figure 1: Development of average rental price per square meter in the Netherlands.
Source: Pararius

As purchase costs increase, BTL investors will be looking for ways to maintain their target yield. One way of doing that has been to frontload the purchase of the property, which many investors did. In an analysis of offer data from HDN, we found that offer volume for BTL loans in 2021-Q1 dropped by as much as 35% compared to offer volumes in 2020-Q4. This was primarily driven by an increase in offers during 2020-Q4 and a subsequent drop in offers in 2021-Q1, as offer volume in 2021-Q2 to 2021-Q3 is at a similar level as 2020-Q1 to Q3.

Another way for an investor to maintain its target yield would be to increase rental prices, which could be a viable option in a tight rental market. LoanClear has performed an analysis to determine how rental yield (IRR) is impacted by the increased transfer tax and what impact this could have on rental prices. Rental yield is dependent on many factors, such as the investment horizon of an investor, the development of house prices and costs during the investment period. In Table 1 below, a list of all assumptions used for the analysis can be found.

Table 1: Assumptions for rental yield analysis.
Source: LoanClear

For the analysis, multiple scenarios have been investigated, ranging from an investment horizon of 10 years to 30 years and for different ways of financing the property. Obviously, the increased transfer tax will have a negative impact on the rental yield of the investor. However, the main question is how big the impact will be, and which rental increase is required to offset the rental yield decrease.

The results of the analysis are given in Table 2 below.

Table 2: Rental yield analysis results.
Source: LoanClear

As can be seen in the results of the analysis, rental yield is impacted quite significantly, sometimes by as much as 2.79%. In order to compensate for this loss of yield, investors would have to increase rental prices by up to 15.7% in case of a 10-year investment horizon (10 years is the most popular fixed-rate period in the BTLC market) and financing the property with 50% interest-only. It is unlikely that rental prices will increase by this much in the short term due to the increased transfer tax, as many investors bought their property before this measure became effective. However, as time progresses and more investors purchase a property for which they must pay the 8% transfer tax, this will put upward pressure on rental prices.

Note that this analysis is meant as a comparison between the two transfer tax scenarios. Therefore, the analysis is less sensitive to some of the assumptions that are used. Investment decisions are very much sensitive to some of these assumptions. The assumptions used here are not necessarily representative of each BTL investment.