Belgium’s house prices up again, despite troubles
Last Updated: December 02, 2010
Belgium still has no government, six months after the mid-June elections. With a national debt as big as its economy, many experts believe it is next in line for a sovereign-debt crisis.
Yet house prices rose by 5.5% during the year to Q3 to €183,260, and were 2.4% up on the quarter, the highest of six consecutive quarterly house price increases, according to Statistics Belgium (StatBel).
Other property types registered stronger price increases.
- The average price of apartments (including studios and flats) jumped 6.9% to €188,594 during the year to Q3, and were up 2.8% q-o-q.
- The average price of villas (including bungalows and country houses) rose 6.4% to €320,849 from a year earlier.
In Brussels, price rises moderated. The price of ordinary houses increased during the year by 8.3% to €339,619 during the year to Q3; down from an increase of 17.3% during the year to Q1, and 9.6% to Q2. Prices only rose 1.6% during Q3.
The average price of ordinary houses rose by around 4.6% during the year to Q3 in Flanders (to €194,844).
There are several reasons for continued house price rises. One is Belgium’s strong economy. Belgium’s GDP rose 2.1% y-o-y to Q3 2010, with growth projected to be 1.3% for 2010 and 1.6% for 2011.
Secondly, there is a high degree of autonomy in the regions. Despite a caretaker government since April, vital government operations have not been interrupted. This autonomy, however, has contributed to the huge government debt, as local politicians treat the national budget as a common resource.
Belgium’s debt, expected to hit 101% of GDP by end-2010, is the largest in the EU after Greece, Italy and Ireland. Until a new government is formed, no clear policies can be expected. The New Flemish Alliance (N-VA), which won the most seats, has yet to find enough coalition partners.
Another round of costly elections may be necessary.
Brussels prices surge ahead
Belgium is divided into three regions:
- the Flemish Region that occupies the northern half with Dutch-speaking communities;
- the Walloon Region which occupies the southern-half and is made-up largely of French-speaking communities with a small German-speaking community in the south-east; and
- Brussels, the administrative capital region, an officially tri-lingual city inside the Flemish region.
Each region and community has a separate parliament and executive administration. Power has been increasingly devolved. There is also a persisting ethnic conflict, and the political union has come under rising threat.
Property prices in Belgium’s three regions move in the same price cycle, but the capital has registered much the highest price increases. Prices in Brussels surged almost 200% (140% in real terms) from 1998 to 2008, much more than in the two other regions (143% for the Flemish region and 116% in Walloon) over the same period, according to StatBel.
Prices also fell most in Brussels during 2009, though the falls were relatively insignificant. The average price of ordinary houses in Brussels decreased 1.9% in 2009; more than the 0.9% price fall for Walloon, and worse than the 1% nominal increase in the Flemish region. When adjusted for inflation, houses prices fell in all areas.
The drivers of Belgium’s house price boom were:
- rapid mortgage market expansion due to low interest rates and increased competition between banks; and
- relatively strong economic and wage growth.
When these conditions were reversed with the global credit crunch, house price rises stopped. But now the economic recovery, helped by low interest rates, is causing house prices to rise strongly again.
Record low mortgage rates
Mortgage rates moved down in March 2009 to 2.84% for floating rate mortgages and 4.16% for new mortgages with 10-year interest rate fixation (IRF), in line with the historically rock-bottom levels seen in 2005.
Interest rates recently peaked at 5.33% in October 2008 (for new mortgages with 10-year interest rate fixation (IRF), while those with floating rate and up to 1year IRF peaked at 6.02%.
Mortgage growth and stability
The Belgian mortgage market has been dominated by four major private financial institutions: Fortis, Dexia, KBC, and ING Belgium since a wave of privatization, mergers and acquisition in the 1990s. All four have interests spread across the financial industry including investment management, retail banking and insurance. Intense competition has led to low fees and charges, and more mortgage options.
Despite the credit crunch, the mortgage market grew 9% in 2008 and 7.5% in 2009. In Q1 2010, outstanding mortgage credit rose to €147.6 billion, 8.5% higher than a year earlier.
Fixed-rate mortgages dominate
Mortgages in Belgium typically have a 20 year duration, and a loan-to-value ratio of 80% to 85%. Since 2008, more than 80% of new loans have had interest rates fixed for the duration of the loan, or for ten years or more.
However, the sensitivity of households to interest rate changes has changed over the years. At the end of 2002, less than 20% of new mortgage contracts had an IRF of less than three years. Between 2003 and 2005, borrowers shifted to mortgages with shorter IRFs with interest rates typically one percentage point or more lower than fixed rate mortgages (FRM). The share of mortgages with IRF of less than 3 years rose to almost 60% at end-2004.
With the interest rate hikes from 2006 to 2008, households shifted to longer term FRMs. The share of mortgages with IRF of 3 years or less shrank to around 1% to 2% of total loans in 2007 and 2008.
Bank bailouts everywhere
Belgian financial institutions were among the worst hit by the 2008 financial meltdown. Losses from international operations, exposure to the US subprime mortgage markets, and commitments to previous expansion programs led to massive liquidity problems.
For instance, Fortis, the largest mortgage lender in Belgium, was cash-strapped after paying €24 billion for participation in the €70 billion purchase of ABN Amro in 2007. To prevent Fortis collapsing, it was partly nationalized by the governments of Netherlands, Belgium and Luxembourg to the tune of €11.2 billion.
With assets bigger than the Belgian economy, Fortis is one of the biggest European banks bailed out in 2008. After the bailout, Fortis was carved up and sold, with only the insurance operations left. Its Belgian assets and operations were sold to BNP Paribas, after a lengthy and messy judicial process.
Dexia and KBC were likewise bailed out, after suffering major losses.
- The bailout of KBC Bank, which has major operations in Eastern Europe, was one of the most expensive. A total of €7 billion was injected into KBC, and on May 2009 the government announced that it is providing a guarantee of €25 billion to KBC Bank.
- The governments of France, Belgium and Luxembourg provided €6.4 billion to keep Dexia afloat.
In July 2010, Dexia and KBC Bank passed the EU-wide stress tests.
While the bailouts prevented a financial market collapse, they came at a huge cost. The initial bailout of Fortis led to the fall of the government in December 2008. The government’s public debt also rose significantly, from 84% of GDP in 2007 to 96.7% in 2009.
Subdued rental market
Belgium’s rapid price increases have pushed gross rental yields sharply down, to around 4.5% to 6% for apartments in Brussels, according to Global Property Guide research (see Rental Yields) in May 2009. From 1998 to 2008, rents in the private sector rose by a mere 27% while apartment prices rose 127% over the same period.
In 2009, private sector rents rose 4.9% while apartment prices rose by a mere 1.9%, In Q1 2010, private rent increase outpaced apartment price growth: 6% y-o-y compared with4.9%. These are not enough, however, to push long term yields up.
The rental market has been subdued for a number of years because of rent controls (see Landlord and Tenant section) and the rising number of homeowners. The rental market is significant, at about 30% of the housing stock (23% in the private sector, 7% in social housing); but this is falling, and is down from 38% in 1980 and 33% in 1990. However, 60% of households in Brussels are renters, a fact partly encouraged by Belgium’s unusually high buy/sell costs.
Supply and demand
In Q1 2010, total housing transactions reached 27,281, 12.6% higher than in the same period last year. In 2009 113,000 dwellings were sold, lower than the more than 120,000 dwellings sold annually from 2005 to 2008.
Dwelling permits and dwellings starts dropped from 2007 to 2009, due to the weak housing market. For instance, only 41,508 dwellings were started in 2009, compared to an average of 55,400 units from 2005 to 2007. Dwelling permits also fell to around 45,000 units in 2009, lower than 58,000 permit annual average from 2005 to 2007.
The housing market’s performance is strongly influenced by the economy. The Belgian economy expanded by an average of 2.64% between 2004 and 2007, after an average annual 1.05% GDP growth from 2001 to 2003. The unemployment rate went down to 7.1% in 2008 from 8.5% in 2005.
With the global financial meltdown, Belgium’s GDP contracted by 3% in 2009, and unemployment rose to 7.9% at the end of 2009 and is expected to rise further to 8.2% by the end of 2010.
Economic recovery remains fragile. Although GDP expanded in Q1 by 0.1% q-o-q, it was lower than the increases of 0.7% in Q3 and 0.3% in Q4 2009. The economy is expected to grow by around 1.3% in 2010 and 1.8% in 2011.
Regardless of who emerges as part of the new coalition government, austerity measures are expected to cut the deficit and the national debt. But unpopular cost cutting measures are difficult to implement, especially in politically-divided countries like Belgium.
- Belgium’s housing market surprisingly vibrant - January 20, 2017
- Reasonable yields for investors in Belgian property, but high transaction costs - May 03, 2016
- Though overvalued, Belgium's housing market is heading up - April 01, 2015
- Belgian housing market weakens - May 05, 2014
- Belgian housing market continues to weaken, amidst worsening economy - April 28, 2013
- Belgian property market cools amidst political woes - December 02, 2011
- Belgium’s house prices up again, despite troubles - December 02, 2010
- Belgian house prices post<br>strong gains in Q1 2010 - July 28, 2010