Reuters.com: New 'Dutch disease' has lessons for U.S. housing
New 'Dutch disease' has lessons for U.S. housing
The term "Dutch disease" refers to the 1960s, when the discovery of natural gas in the Netherlands led to a sharp rise in exports, driving up the currency and hurting export-oriented manufacturers. But Europe's sixth-largest economy recovered to be the envy of its neighbors with low unemployment and growth rates of 2.9 to 4.3 percent from 1994 until 2000, helped by wage restraint and booming exports. Rising asset prices allowed Dutch pension funds to keep premiums low, and house prices, which rose by a half from 1997 until 2000, stimulated consumption further as owners borrowed --and spent -- against the higher value of their homes. The Dutch central bank estimated in 2003 that spending on consumer goods, electronics and holidays financed by cheap mortgages boosted gross domestic product by as much as 1 percentage point in 1999 and 2000. "House prices tend to stimulate consumer spending so much that just removing that stimulus tends to lead to a sharp deceleration of consumption," Fortis economist Nick Kounis said. "For the housing market to start being a drag on consumer spending, you just need it to stop providing a boost." In the United States, economists worry that an end to the housing price surge could make the 2000 bursting of the technology stocks bubble look tame in comparison. Federal Reserve chairman Alan Greenspan has warned of "froth" in some regional U.S. housing markets as prices soar at double-digit annual rates. In Britain, booming house prices helped finance a consumer boom in the last few years as Britons extracted a record amount of equity from the rising value of their homes. But the era of British house prices rises of 25 percent or more per year is clearly over especially after five interest rate hikes. Analysts say that prices could soon fall, and spending habits are already changing.
