The latest price indicators paint an overly optimistic picture of the real evolution of housing prices
Demand for mortgage loans in the Belgian real estate market is currently at its lowest level since measurements began in 2007. Only 108,000 mortgage loans were granted in the first half of this year, 43% less than in the same period of the year. last year, when the number had already fallen sharply due to rising interest rates. Compared to the first half of 2021, loans were 54% lower.
Fig. 1: Number of mortgage loans granted for the purchase of a home, the first six months of each year (in thousands)
Despite the sharp drop in demand, the impact on prices seems quite limited. The latest price barometers show that house prices are holding up well: The Statbel house price index increased by 1.5% in the first quarter of 2023 compared to the last quarter of 2022. The notarial barometer, which contains Data on purchase and sale contracts until June shows that house prices in Belgium fell only slightly, by 0.3% in the first half of the year, compared to the average price of last year. This was mainly due to a drop in prices in Wallonia and Brussels. In Flanders prices would have continued to rise.
However, we must be careful when interpreting these price barometers, as they may overestimate the true price development. The type of homes sold also plays a crucial role. Average prices increase not only when homes become more expensive but also when the characteristics of the homes sold change. For example, if larger, more expensive homes sell in a given year, this raises the average price.
Suppose that a real estate market is made up of ten homes: two quality homes worth 500,000 euros, six mid-range homes priced at 350,000 euros and two homes in the cheapest segment priced at 200,000 euros. The average price is 350,000 euros. But if the houses in the lower segment are on sale for longer and, for example, only one is sold, the average house price rises to 366,000 euros, without the prices of individual houses really increasing.
We are already starting to see this effect emerge quite clearly in regions like Flanders. The introduction of the renovation obligation has considerably reduced interest in energy-intensive houses, which are also generally cheaper. If fewer of these cheaper homes are sold, the median price increases, but that doesn’t necessarily mean that all home prices have increased.
Longer-term debt is developed
The market was also supported last year by relatively strong wage growth thanks to automatic wage indexation and an extension of the average loan term, which slowed the crisis. The average term of new ING mortgages has increased from 18.9 years in 2021 to 19.8 years in 2022. In the first half of 2023, the average maturity continued to increase. We’re also seeing longer-term loans among younger first-time buyers, who are mostly opting for the 25-year term option that allows them to borrow more for the same monthly payment amount.
While a longer maturity usually results in slightly higher interest rates, this increase is usually limited. A longer maturity helps mitigate the impact of higher interest rates, but only partially. Extending the term by one year increases borrowing capacity by approximately 3% for the same monthly payment. However, the fixed rate on a 25-year loan has increased from 1.5% to 3.5% since the beginning of 2022, reducing borrowing capacity by approximately 19%. Even if we also take into account salary indexation, this still amounts to an 11% drop in the purchasing power of a potential buyer. Therefore, higher wages and longer maturities only partially offset the sharp rise in interest rates.
As house prices hold firm and we see no major changes in the ratio or proportion of income that families spend monthly on loan payments, we are now seeing buyers bring in more savings, often from parents and grandparents. Unfortunately, those with less capital are currently being priced out of the market.
House prices are holding up for now, but for how long?
We expect a stronger downward trend in house prices in the second half of the year. Historically, falling demand has always slowly translated into lower prices. Homeowners need time to adjust to the new reality: They may remember that their neighbor sold their house for a great price two years ago and therefore initially stick with a higher price. As a result, delivery times always increase before prices start to fall. We are also seeing more and more evidence that this is the case and that delivery times have increased quite significantly. Over time, the likelihood that homeowners will feel pressured to accept a lower price and sell begins to increase.
Furthermore, interest rates could still rise slightly further. Currently, the fixed rate on a 20-year loan is around 3.5%. We could see this rise to 3.6-3.8% in the coming months before stabilizing by the end of the year. Buyers could partially offset this with longer-term loans, but there is a limit to the length of loan maturities. Finally, the composition effect on prices described above will also decrease. If a larger number of cheaper, energy-intensive homes are sold again in the next six months, this will put additional downward pressure on average prices.
Therefore, we maintain our forecast of an average drop in house prices of 0.5% this year. This effect is likely to continue as we approach 2024, and we have revised down our price forecast for next year from 1% to 0%. Despite the relatively positive outlook shown by the latest price barometers, we remain quite cautious in our price expectations.
Fig. 2: Evolution of house prices, including ING forecasts (actual prices are nominal prices adjusted for expected inflation)
Stability during economic uncertainty
In any case, we are likely to see house prices in Belgium fluctuate much more than in other countries. According to Eurostat figures (which include data up to the first quarter of 2023), owner-occupied home prices in Germany, the Netherlands and France fell by 9.9%, 3.9% and 1.7% respectively since their maximum levels. The most recent price indicators suggest that prices fell again in the second quarter.
During periods of economic uncertainty, the Belgian real estate market often outperforms other Organization for Economic Co-operation and Development (OECD) countries. An analysis of house prices in several countries since 1990 reveals that Belgium is one of the most stable housing markets in the OECD. The standard deviation of house prices during this period is noticeably lower than that of other countries, indicating that Belgian house prices are generally less prone to extreme fluctuations. Furthermore, house prices in Belgium have fallen in just two years since 1990, significantly lower than in other countries. By contrast, in Germany, France and the Netherlands, house prices fell in 7, 11 and 5 different years, respectively, during the same period.
Fig. 3: Standard deviation of house prices, since 1990
Another surprising observation is that even when falls in house prices occur, these corrections are not as pronounced in Belgium as elsewhere. Belgium’s biggest annual correction since 1990 was a relatively modest 0.6% drop in 2014, according to OECD figures. By comparison, in Spain, house prices fell by 14.8% in one year in 2012, and in the United States by 8.2% in 2008. Price drops in these countries also occurred when similar patterns were observed for several consecutive years. On the contrary, the Belgian real estate market has shown clear signs of a higher level of stability during periods of economic uncertainty than in other countries.
Fig. 4: Largest annual price drop since 1990
There are several factors that explain the stability of the Belgian real estate market. Firstly, Belgian banks tend to be somewhat more conservative when granting credit for the purchase of real estate due to the macroprudential regulatory framework of the financial regulator. This inhibits speculation and prevents households from being unable to pay their loans due to over-indebtedness, which benefits market stability. Belgian prices also rise less rapidly during boom periods, reducing the risk of market overheating.
Lastly, Belgians highly value ownership of their own home. This moderates price fluctuations, as potential buyers are not likely to abandon their search for fear of a price drop. Despite higher interest rates and stricter regulations, it seems that the majority of Belgians still see the real estate sector as a safe and sound investment.
A recent ING survey conducted by Ipsos on a representative sample of 1,000 Belgians at the end of June 2023 shows that the majority are still very confident that prices will continue to rise over the next year. 60% of respondents expect a price increase of between 0 and 2.5% over the next year, 20% believe prices will rise more sharply and the remaining 20% believe prices will fall. Surprisingly, 51% of respondents do not believe that house prices will ever go down, and this strong belief that house prices will continue to rise is an important stabilizing factor.
These figures are surprising. 67% of respondents believe that the real estate market is currently overvalued (17% believe valuations are correct, 4% think prices are too low and 12% have no opinion). Most Belgians are also pessimistic about the future affordability of real estate: 71% expect that young people will find it more difficult to realize their housing dreams in the next three years.
For now, we remain cautious in our outlook for the Belgian real estate market and expect to see a slight decline of 0.5% this year and stagnation next year. The composition effect that exerts upward pressure on average prices will progressively soften. Wage growth will also slow this year, while we expect interest rates to rise slightly further. Weak credit demand and longer response times already point to a further cooling in the second half of the year. However, since we have historically experienced few major price shocks in Belgium, we should not expect major changes either.