By Anthony Deutsch
LANSINGERLAND, Netherlands (Reuters) - The euro zone crisis is washing over the walls of one of the region's safest havens.
So far the Netherlands, a founding member of the European Union and fiscal hawk along with neighboring Germany, has been spared the dramatic collapse of property prices associated with southern European countries such as Spain.
Housing prices have fallen roughly 15 percent since 2008, compared with up to 30 percent in Spain since the crisis began.
Now, though, four years after the global financial crisis first hit, the economy is on the brink of another recession. And steadily sinking property prices are exposing a deep Dutch weakness: unpaid mortgages.
The Dutch, who have been able to borrow up to 12 times their income to buy homes, are leveraged to the hilt. By some measures the Netherlands has the highest per capita mortgage debt in the European Union.
ING, one of the country's largest lenders, forecast earlier this month that by next year, the debt on one in four mortgaged homes will exceed their value.
The Dutch expression is graphic - they say such homes are under water.
In the low-lying Netherlands, that's evocative enough. The problem is also bigger than the economy. Collective Dutch mortgage debt rose from 140 billion euros in 1995 to 640 billion euros ($790 billion) last year - or from 46 percent to 105 percent of GDP.
On top of that, the central bank predicts economic growth in the seven years through 2014 will be the lowest since World War Two. The European Commission in May forecast the Dutch economy would shrink by almost one percent this year.
In July, Moody's said it might downgrade its rating on Dutch government debt. "This dynamic creates additional fiscal headwinds and means that the Dutch government's debt burden will begin to fall later and from a higher level," it said.
If housing prices fall another 10 percent, the central bank projected last year, 30 percent of all mortgages would no longer be covered by the home value. That would lead to losses at the four Dutch commercial banks, where about one third of lending comes from mortgages and which are already reporting rising mortgage delinquency.
Dutchman Nico van Os's experience shows how the problem runs from the countryside to the heart of the state's finances. He and his father tended greenhouse flowers in the western Netherlands for decades, trading overseas and hiring locally.
In 2003, as the property bubble was inflating, the local authorities persuaded them to cash out the family business and sell their land to a multi-billion-euro property development.
"They acted as if the trees could grow to the heavens," said Van Os, recalling how bitter he was at the pressure to sell.
A decade later, the land his family and six neighboring farms sold to the government is an overgrown field. A plan to build 2,800 houses has been scrapped.
The defunct Van Os business is just one headache for the municipality of Lansingerland, a sprawling new residential development with 56,000 residents just north of Rotterdam.
Lansingerland bought land from owners like Van Os and ran up debts almost double its income. Until recently, it was among the country's fastest growing regions, building 1,000 homes in 2008. This year, 300 looks optimistic.
Scores of projects have been cancelled and this year it wrote off 45 million euros in losses.
But mayor Ewald van Vliet's worries extend beyond his region.
"Of the Europeans, the Dutch spend the most on housing and that's where there is a large risk," he said. "I am worried that the risk is being underestimated."
Where Dutch households had since the 1990s been able to borrow up to 12 times gross salary, since the Lehman crisis new guidelines have lowered that to around five times.
The Dutch used excess value to move to larger homes or as consumer credit. The cash bought new kitchens and bathrooms, cars, luxury holidays and recreational boats. Interest on mortgages remains tax deductible. In half of all mortgages, repayment of the principal is deferred for up to 30 years.
Van Vliet said the Dutch face a "poisonous cocktail". As recession pops a real estate bubble and the housing market seizes up, there's uncertainty about a political agreement to end such cheap credit.
Lansingerland has joined an increasing number of Dutch municipalities that are on the verge of turning to central government for help. The number doubled in 2010 to 35, or nearly one in 10 of the Netherlands 415 municipalities, consultancy Deloitte found.
The Deloitte report, commissioned by the Dutch government, found municipalities have largely not taken into account billions of euros in potential losses on property investments.
House prices could have a lot further to fall. By 2013, mortgage leader Rabobank has forecast, the price decline from 2008 peaks will have reached nearly 18 percent.
That compares with a slide of 34 percent in the previous housing crisis in the late 1970s and early 1980s.
"We're talking about serious money; billions in potential collective write-downs by Dutch municipalities," says Van Vliet.
The Dutch central bank expects a moderate recovery in 2013 and 2014, assuming the euro zone problems don't worsen.
The country is headed for elections on September 12. No party will win an outright majority, in a election largely focused on the future of the euro, but polls indicate the far-left Socialist Party is in the lead, slightly ahead of the pro-business Liberals.
Besides implementing billions in spending cuts and halting economic decline, a new government will be tasked with working out how to phase out more than a century of the subsidies that encouraged high indebtedness.
Dutch householders, who spend more than a quarter of their household income on their homes, can expect only pain.
"They wanted everything and now they have nothing," said Van Os. "It's only going to get worse."
(Additional reporting by Gilbert Kreijger in Amsterdam; Editing by Sara Ledwith and Richard Woods)