Housing affordability in a monetary economy: An agent-based model of the Dutch housing market

Overview of the Research Initiative

The paper “Housing affordability in a monetary economy: An agent‑based model of the Dutch housing market” is a working paper (No. 222) published by the Macroeconomic Policy Institute (IMK) at the Hans‑Böckler Foundation. Authors Ruben Tarne and Dirk Johan Bezemer are researchers affiliated with the University of Groningen, contributing expertise in macro‑economics and agent‑based modelling. The study addresses the global housing affordability crisis by focusing on the Dutch market, using a calibrated heterogeneous‑agent model to explore monetary and financial determinants of housing shortages.

Methodology and Model Structure

An agent‑based model represents 10 000 households of three types—owner‑occupiers, buy‑to‑let (BTL) investors, and social‑housing residents—interacting with a single commercial bank that issues mortgages under loan‑to‑value (LTV) caps. The model operates in monthly steps, calibrating parameters to 2017 Dutch household data (e.g., income distribution, mortgage characteristics). Housing supply is exogenously set, while the model captures demographic ageing, income dynamics, and credit constraints. Validation compares simulated cycles, LTV ratios, age distribution, and transaction volumes with empirical Dutch statistics.

Core Findings on Price Dynamics

The simulations indicate that a 10 % reduction in the peak house‑price index can be achieved by any of three policy levers:

• Reducing the bank’s LTV cap from 96.9 % to 93.3 %.
• Raising the average mortgage interest rate from 4.0 % to 5.4 %.
• Increasing the ratio of private properties to households from 69 % to 74 %, equivalent to constructing roughly 420 000 new homes. These results align with external estimates that adding 80 000 homes would lower prices by 1‑2 %; extrapolation suggests 400 000‑800 000 additional units would be required for a 10 % price drop. The model shows that BTL investors drive price upswings, while first‑time buyers (FTB) have limited impact on peaks.

Affordability Implications for First‑Time Buyers

Policy experiments reveal divergent effects on FTB affordability:

• Lowering LTV caps for all borrowers raises down‑payments and reduces loan‑to‑income ratios, limiting access for lower‑income households.
• Restricting LTV caps only for BTL investors improves FTB affordability by allowing larger loans and smaller down‑payments for owner‑occupiers.
• Raising interest rates reduces average down‑payments for FTBs, though it also raises borrowing costs.
• Expanding housing supply lowers purchase prices but may be captured predominantly by BTL investors, especially when income inequality is high, thereby limiting gains for FTBs.

Role of Income Inequality and Investor Behaviour

The study highlights that the distribution of income and wealth shapes policy effectiveness. Simulations with a high share of potential BTL households (reflecting greater inequality) show that additional housing units are more likely to be purchased by investors, reducing the share of FTB owners. Conversely, when the BTL share is low, increased supply modestly raises FTB ownership. This feedback loop underscores the importance of targeting financial policies alongside construction measures.

Policy Recommendations and Outlook

The authors conclude that while large‑scale construction can theoretically reduce house prices, practical constraints—political, regulatory, and environmental—make monetary and financial tools more feasible in the medium term. Tightening LTV caps and modest interest‑rate adjustments emerge as effective levers to temper price peaks without relying solely on new housing stock. The model suggests that coordinated macro‑prudential policies, especially those aimed at limiting investor leverage, can enhance affordability for first‑time buyers across Europe.

Contribution to Sustainable Housing Discourse

By integrating monetary dynamics, credit constraints, and demographic factors, the paper provides a nuanced quantitative framework for policymakers addressing housing affordability. Its agent‑based approach offers insights into how financial regulations and supply‑side interventions interact, informing sustainable housing strategies for pan‑European audiences seeking evidence‑based solutions.