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The Dutch housing market is recovering strongly from the crisis, with considerable regional differences. Major cities such as Amsterdam, The Hague, Utrecht and Rotterdam, are witnessing stronger house price rises than the rest of the Netherlands. Despite signs of overheating in the large urban housing markets, there is no credit-driven bubble in cities as yet. Spiraling house prices in the cities are mainly attributable to scarcity pricing: ongoing migration to the cities is spurring demand for urban housing and supply is failing to keep pace. The result is a shortage of affordable housing, particularly in the non-rent regulated rental sector, putting middle-income earners in a tight spot. Supply in the non-rent regulated sector is growing slowly due to planning restrictions on new-build developments, a lack of planning and construction capacity, and the absence of effective incentives for mainly municipalities. The government should encourage municipalities to increase supply in the non-rent regulated sector, and mortgage interest deductibility should be lowered further to level the playing field between buying and renting.

Banking regulation has proven to be inadequate to guard systemic stability in the recent financial crisis. Central banks have provided liquidity and ministries of finance have set up rescue programmes to restore confidence and stability. Using a model of a systemic bank suffering from liquidity shocks, we find that the unregulated bank keeps too much liquidity and takes excessive risk compared to the social optimum. A Lender of Last Resort can alleviate the liquidity problem, but induces moral hazard. Therefore, we introduce a fiscal authority that is able to bail out the bank by injecting capital. This authority faces a trade-off: when it imposes strict bailout conditions, investment increases but moral hazard ensues. Milder bailout conditions reduce excessive risk taking at the expense of investment. This resembles the current situation on financial markets, in which banks take less risk but also provide less credit to the economy. JEL Classification: E58, G21, G28

Banking regulation has proven to be inadequate to guard systemic stability in the recent financial crisis. Central banks have provided liquidity and ministries of finance have set up rescue programmes to restore confidence and stability. Using a model of a systemic bank suffering from liquidity shocks, we find that the unregulated bank keeps too much liquidity and takes excessive risk compared to the social optimum. A Lender of Last Resort can alleviate the liquidity problem, but induces moral hazard. Therefore, we introduce a fiscal authority that is able to bail out the bank by injecting capital. This authority faces a trade-off: when it imposes strict bailout conditions, investment increases but moral hazard ensues. Milder bailout conditions reduce excessive risk taking at the expense of investment. This resembles the current situation on financial markets, in which banks take less risk but also provide less credit to the economy.