Belgium’s housing market shows signs of slowdown

Belgium’s housing market is now noticeably cooling, as property demand wanes amidst rising interest rates. During the year to Q1 2023, the nationwide house price index in Belgium rose by a modest 4.84%, following a y-o-y increase of 6.65% in the same period last year, according to Statistics Belgium. However, in real terms, prices actually declined by 2.08% over the same period.

Quarter-on-quarter, the overall house price index increased 1.5% in Q1 2023 (1.91% in real terms).

Belgium’s house price annual change

Existing dwelling prices rose by a modest 3.95% y-o-y in Q1 2023 (but fell by 2.91% when adjusted for inflation). New dwelling prices increased by 7.76% (0.65% in real terms).

Demand is now falling rapidly. In Q1 2023, the total number of residential property transactions in the country dropped by a huge 26.2% to 29,212 units as compared to a year earlier, following y-o-y increases of 5.1% in 2022 and 17% in 2021, according to Statistics Belgium. All three regions saw a decline in residential property transactions in Q1 2023 from a year earlier.

During Belgium’s housing boom (2000-Q3 2008), nationwide house prices soared by 129% (86% inflation-adjusted). Since the global financial crisis, house prices have followed the economy. When the economy was strong, house prices rose. When the economy was weak, house prices stagnated.

When the economy emerged from recession in 2011, the housing market bounced back strongly with Brussels house prices surging by 9.6% (5.7% inflation-adjusted). After then house prices rose slowly, by an annual average of just 1.2% in 2012-2015. Since then the pace has quickened again. House prices rose by 2.5% in 2016, 3.6% in 2017, 2.5% in 2018, and 4.8% in 2019, on the back of improved economic growth.

Surprisingly, the housing market remained strong in the past three years, despite the Covid-19 pandemic. House prices rose by 5.7% in 2020, by 6% in 2021, and by another 4.8% in 2022. But signs of a slowdown were evident in the second half of 2022.

The Belgian economy expanded by 3.1% in 2022, following annual growth of 6.1% in 2021 and a contraction of 5.4% in 2020.

With deteriorating economic conditions, Belgium’s housing market is expected to weaken further in the medium term. “Belgian house price growth came to a standstill in the second half of 2022. In 2023, the housing market will cool down further. We expect prices to fall by half a percentage point this year,” said ING.

“Rising mortgage rates, in combination with high inflation and the energy crisis, will further slow down the housing market in 2023, according to our analysis,” added ING.

In Q2 2023, Belgium’s economy grew by a meager 0.9% from a year earlier, its weakest pace since Q1 2021, as inflation, tighter financing conditions, and heightened uncertainty is adversely affecting domestic growth while global economic and geopolitical uncertainty, as well as weak trade prospects, weigh on net exports, according figures from NBB.

The country’s economic growth is expected to slow to 1.2% this year, following annual expansions of 3.2% in 2022 and 6.1% in 2021, based on the European Commission’s projections. The IMF’s economic growth forecast for Belgium for the year 2023 is even more pessimistic, at only 0.7%.

Regional house price variations

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, is an officially tri-lingual city inside the Flemish region.

Each region and community has a separate parliament and executive administration, with power increasingly devolved. There is 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 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), according to figures from Statistics Belgium.

The drivers of Belgium’s house price boom were:

• rapid mortgage market expansion, due to low interest rates and increased competition between banks; and
• economic and wage growth.

When these conditions were reversed with the global credit crunch, house price rises slowed sharply. From 2009 to 2019, house prices in Brussels increased by only 28% (7% in real terms). In the Flemish and Walloon regions, prices rose in 2009-2019 by 37% (15% in real terms) and 27% (6% in real terms), respectively.

Surprisingly house price growth has noticeably strengthened in the past three years despite the pandemic. In 2020-22, Brussels house prices rose by 21.4% (6.2% in real terms). In the Flemish and Walloon regions, house prices increased by 20.5% (5.4% in real terms) and 18.2% (3.4% in real terms), respectively.

In Q1 2023:

• In the Brussels-Capital region, the median price of closed or semi-closed type houses rose slightly by 1% y-o-y to €500,000 (US$548,225) while it declined sharply by 31% to €845,000 (US$926,500) for open type houses. Apartment prices increased by a modest 2.4% y-o-y to €255,000 (US$279,595).
• In the Flemish region (Flanders), the median prices of closed/semi-closed, and open-type houses rose by 7.1% to €299,999 (US$328,934) and by 5.1% to €415,000 (US$455,027), respectively. Apartment prices increased 6.3% y-o-y to €244,375 (US$267,945).
• In the Walloon region (Wallonia), closed/semi-closed house prices rose by 3.6% y-o-y in Q1 2023 to €175,000 (US$191,879) while open-type house prices were unchanged at €285,000 (US$312,488). The median price of apartments rose by 5.9% y-o-y to €180,000 (US$197,361).

Belgian housing is overvalued, but by how much?

Belgian house prices remain overvalued, but there are many different opinions on the extent of overvaluation. Recent estimates put the overvaluation between 9% and 15%, a sharp deceleration from more than 50% before the pandemic.

According to a recent report published by KBC Economics in March 2023, the deceleration in house price growth, coupled with strong household income growth, high inflation, automatic wage indexation, and robust job creation, puts downward pressure on the overvaluation of the Belgian housing market.

“The household debt ratio continued to rise in recent years, although that trend seems to have reversed recently. The headwinds in the housing market will likely result in a further deceleration in the nominal price growth rate in 2023-2024. Given still relatively high general inflation, that implies a house price decline in real terms,” said the KBC report.

A recent study conducted by Belfius showed a more modest house price overvaluation of at least 8.73%, with the overvaluation most pronounced in the provinces of Antwerp and Walloon Brabant, the east of Limburg on the coast, the region around Liège and the Brussels-Capital region.

ING expects the country’s house price overvaluation to moderate further this year, resulting in improved affordability, amidst falling demand and economic slowdown. “We expect affordability to improve again in 2023 thanks to below-inflation house price developments and stabilizing mortgage rates,” said ING.

“As a result, overvaluations will also decrease. We expect average inflation to fall from an average of 9.6% last year to 5.8%. If house prices fall by 0.5% according to our forecast, this equates to a drop in real prices of more than 6%. This reduces overvaluation and improves affordability,” added ING.

This is supported by the National Bank of Belgium (NBB), the country’s central bank. In its Financial Stability Report 2023, the NBB noted: “Due to this moderation of house price growth, the gap between actual property prices and prices estimated using the Bank’s model declined to 10%. However, this indicator should be interpreted with caution given that it is an estimate based on an econometric model, which is more uncertain in the context of high inflation. The slight narrowing of this gap in 2022 reflected the downturn in inflation-adjusted house prices and the impact of accelerating inflation on the real interest rate.”

An earlier study conducted by the Organisation for Economic Co-operation and Development (OECD) before the Covid-19 pandemic has suggested that Belgium’s housing market is overvalued by as much as 50% because incomes have not risen as quickly as house prices. Similarly, Deutsche Bank said that Belgian homes are 53% overvalued, with house prices still 51% higher than the historical average, relative to income.

Residential construction activity is plummeting

During 2022, the total number of new residential building permits authorized in Belgium fell by 9.8% y-o-y to 28,654, in contrast to an 11% increase in 2021, according to Statistics Belgium. Similarly, dwellings authorized were down by 10.6% last year, at 51,509 units, following an increase of 4.2% in the prior year.

By region:

• In the Flemish region, residential building permits dropped 9% to 21,402 in 2022 from a year earlier while dwellings authorized declined by 8.4% to 40,165 units over the same period.
• In the Brussels-Capital region, residential building permits fell by 12.2% to 144 during 2022 while dwellings authorized dropped by 21% to just 616.
• In the Walloon region, new residential building permits were down 11.9% y-o-y to 7,108 in 2022 and dwellings authorized plunged by 17.3% to 10,728 units.

 All provinces experienced declining residential construction activity. Namur saw the biggest annual decline in the number of new residential building permits last year, at 23.4%, followed by Vlaams-Brabant (-16.5%), Liège (-15.1%), Hainaut (-10.9%), Limburg (-9.7%), West-Vlaanderen (-9%), and Antwerpen (-7.8%). More moderate declines were recorded in the provinces of Oost-Vlaanderen (-4.8%), Luxembourg (-2.2%), and Brabant Wallon (-0.9%).

Construction activity continues to decline this year. In the first four months of 2023, there were 9,091 new residential building permits issued, down by 14.9% from the same period last year and by 18.9% two years ago. Likewise, the number of dwellings authorized dropped 12.2% from the previous year and by 19.6% two years earlier, to just 16,123 units. 

Property transactions are now falling

Property demand is now declining in Belgium, as higher interest rates discourage homebuying. In Q1 2023, the total number of residential property transactions in the country dropped by a huge 26.2% to 29,212 units as compared to a year earlier, according to Statistics Belgium.

By region:

• In the Flemish region, residential property transactions fell sharply by 32.6% y-o-y to 18,178 units in Q1 2023, following annual growth of 8.2% for the full year of 2022 and 20% in 2021.
• In the Walloon region, sales transactions were down 10.5% y-o-y to 8,619 units in Q1 2023, after falling slightly by 0.5% during 2022 but increasing by 10.3% in 2021.
• In the Brussels-Capital region, sales transactions declined by 18.1% to 2,415 units in Q1 2023 from a year earlier, in contrast to a y-o-y increase of 0.7% in 2022 and 18.9% in 2021.

 The slowing demand has already been evident last year, with transactions rising by just a modest 5.1% to 150,666 units, a sharp deceleration from the prior year’s 17% growth. Before the Covid-19 pandemic, transactions had been growing by an annual average of nearly 10% from 2016 to 2019.

Mortgage interest rates rising, following ECB rate hikes

The average interest rate on housing loans rose to 1.94% in June 2023, up from 1.72% in the same period last year and 1.79% two years ago, according to the European Central Bank (ECB).

By maturity, over the same period:

• Up to 1 year maturity: 4.21%, sharply up from 2.17% in June 2022  and 2.02% in June 2021
• Over 1 and up to 5 years maturity: 1.97%, up from 1.45% a year earlier and 1.48% two years ago
• Over 5 years maturity: 1.93%, higher than the 1.72% in the previous year and 1.79% two years earlier

The increase in mortgage interest rates in Belgium in recent months was mainly caused by the European Central Bank’s move to raise its key interest rates to curb inflation. In June 2023, the ECB raised its key interest rate by 25 basis points to 4.0%, its eighth consecutive rate hike since July 2022 and the highest level seen since September 2008.

The Belgian mortgage market is slowing

Belgium’s mortgage market is now showing signs of slowdown, after registering an average growth of 10% annually in the past decade. During 2022, the size of the mortgage market as a percentage of GDP declined slightly to 41.75%, from 42.48% in 2021 and 42.98% in 2020. But it remains a huge expansion from just about 22% of GDP back in 2011.

During 2022, the total amount of new mortgage loans drawn – excluding refinancing – were down by 12.4% y-o-y to €44.92 billion (US$49.25 billion), in contrast to a growth of 18.3% in 2021, based on figures from the central bank. Then in H1 2023, new mortgage loans plunged further by almost 40% to €14.96 billion (US$16.4 billion) as compared to the same period last year.

“Rising interest rates have also led to a turning point in the credit and real estate cycles. In the early months of 2023, annual growth in loans to households and businesses began to decline. This was especially the case for mortgage loans,” said the NBB in its Financial Stability Report 2023.

As a result, the total value of housing loans outstanding rose by just a modest 3.4% y-o-y to €231.65 billion (US$254 billion) in H1 2023, following annual increases of 8.1% in 2022, 8% in 2021, 10.7% in 2020, and 7.6% in 2019, based on figures from the ECB. In fact, it was the lowest growth recorded in more than a decade.

By maturity, in June 2023:

• Up to 1 year maturity: €1.2 billion (US$1.32 billion), up by 8.2% from a year earlier
• Over 1 and up to 5 years maturity: €5.05 billion (US$5.54 billion), up by a minuscule 0.8% from the same period last year
• Over 5 years maturity: €225.41 billion (US$247.15 billion), up by 3.4% from the previous year

The Belgian mortgage market is dominated by four major private financial conglomerates: BNP Paribas Fortis, KBC Bank, Belfius Bank, and ING Belgium, which account for almost two-thirds of the entire banking sector. Intense competition in the past decade has led to low fees and charges, and more mortgage options.

Moderate rental yields, large rental market

Gross rental yields in the Brussels range have remained steady over the past year. Based on research conducted by the Global Property Guide in November 2022, rental yields on apartments in the capital city range from around 4.71% to 5.4%. Meanwhile, the difference between the yields on small properties, which tend to be higher, and those on larger properties, has shrunk.

All of the apartments and houses included in the Global Property Guide survey are located in the prime areas of Brussels – Brussels City, Etterbeek, Ixelles, St. Gilles, Uccle, Woluwe-St. Pierre, and Woluwe-St. Lambert.

“Whilst current yield levels are low, they are higher than in the neighboring countries and thus remain attractive for international investors as a geographical diversification providing stable returns and prospective capital value growth,” said JLL.

The rental market is 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, because of rent controls (see Landlord and Tenant section).

However, 60% of households in Brussels are renters, a fact partly encouraged by Belgium’s unusually high buy/sell costs.

Economic slowdown

In Q2 2023, Belgium’s economy grew by a meager 0.9% from a year earlier, a slowdown from y-o-y expansions of 1.3% in Q1 2023, 1.5% in Q4 2022, 2.1% in Q3 2022, 4.1% in Q2 2022 and 5.4% in Q1 2022, according figures from NBB. It was the weakest pace since Q1 2021, as inflation, tighter financing conditions, and heightened uncertainty are adversely affecting domestic growth while global economic and geopolitical uncertainty as well as weak trade prospects weigh on net exports.

On a quarterly basis, real GDP growth expanded slightly by 0.2% in Q2 2023.

The country’s economic growth is expected to slow to 1.2% this year, following annual expansions of 3.2% in 2022 and 6.1% in 2021, based on the European Commission’s projections. The IMF’s economic growth forecast for Belgium for the year 2023 is even more pessimistic, at only 0.7%.

“Strong cost pressures related to wage increases and tighter financial conditions are projected to continue weighing on business investment. Residential construction is expected to remain under pressure from high financing costs, even though the increased needs for the energy transition are set to play a positive role,” said the European Commission.

“Muted global trade prospects are forecast to weigh on imports and exports in 2023. After a positive contribution in 2022, net exports are expected to contribute negatively to growth in 2023 and in 2024, with exports under pressure due to price increases,” the Commission added.

From 1997 to 2007, the country enjoyed healthy economic growth of about 2.5% per year. But since the global financial crisis, growth has been weak. GDP growth was 0.4% in 2008, -2% in 2009, 2.9% in 2010, 1.7% in 2011, 0.7% in 2012, and 0.5% in 2013, mainly due to the adverse impact of the eurozone debt crisis, according to the NBB.

Belgium’s economy has been sluggish since, registering an annual average growth of just less than 1.3% from 2009 to 2019. Then economic conditions became even worse in 2020 during the onset of the Covid-19 pandemic, with the country suffering an economic contraction of 5.4%.