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Belgian housing market revives after cooling but outlook remains subdued

Research report

2549677815

As in most EU countries, the housing market in Belgium cooled off since autumn 2022. That cooling was quite orderly without a (sharp) fall in house prices. It was thus somewhat milder than that in the EU27 as a whole and contrasted particularly sharply with the price corrections in the housing market in some other countries (including neighbouring Luxembourg and Germany). This does not alter the fact that in Belgium, too, buying and building activity has fallen back considerably in recent years. However, several indicators suggest that we have probably put the cooling-off behind us. Price dynamics are picking up a little and very recently there have also been signs of some improvement in demand for housing, although most indicators remain low.

The cooling has meant that the overvaluation of the Belgian housing market has been eliminated, at least according to the demand-driven KBC model. Thus, overvaluation should no longer be seen as a prime risk for price corrections. Taking into account the expected development of market fundamentals, we assume that house prices will rise moderately, by some 3%, in both 2025 and 2026. This scenario remains surrounded by uncertainty. The most important concerns the extent to which the supply of additional housing will meet housing demand. It is noteworthy in this respect that, since 2023, the number of housing units has stopped growing stronger than the number of households. Too rigid a supply could cause annual price pressures to eventually exceed the expected 3%.

1.   Recent house price developments

Harmonised Eurostat data

Over the past two years, housing market dynamics cooled off in most European countries. However, the cooling did not manifest itself everywhere and, if so, not to the same extent. On the one hand, there are countries where house prices corrected quite firmly: Luxembourg, Germany, Austria, France, Finland and Sweden. On the other hand, there are also countries that have not experienced a single quarter of price decline in recent years: Croatia, Portugal, Greece, Malta, Bulgaria, Lithuania and Slovenia. That the differences between EU countries were large is illustrated in figure 1. Luxembourg and Germany showed the biggest price decline on balance (more than 10%) since Q3 2022. Poland and Bulgaria are the two countries where prices continued to rise most strongly since Q3 2022 (more than 20%). In the EU27 as a whole, there was only a limited price correction, followed by several quarters of roughly stabilisation. During 2024, price dynamics picked up somewhat again, indicating that the EU27 may have left the cooling behind. It is notable that even the countries with a firm correction saw their house prices rebound more recently.

As in most EU countries, Q3 2022 was also a tipping point in Belgium's house price dynamics. However, compared to the EU27 as a whole, the cooling in Belgium was slightly milder. The resumption of house price growth after several quarters of slight decline followed slightly earlier in Belgium than in the EU27, namely from Q3 2023. It was slightly weaker again in the first half of 2024, but picked up further in Q3 2024 (latest available data, see figure 1). The somewhat earlier rebound was due to the again robust rise in prices of new construction, which did stall again during 2024 (figure 2). The again weak Q2 and Q3 figures for new construction brought a welcome tempering, after a cumulative price rise of as much as 8.1% between Q2 2023 and Q1 2024. The price recovery of existing homes since Q2 2023 was more moderate, but accelerated in Q3 2024. 

Although the Belgian housing market held up well all in all, especially compared to a lot of other EU countries, there has been a price correction 'in real terms' in Belgium. This took place between Q3 2021 and Q4 2022 and amounted to a cumulative 7.6% (figure 3). This implies that, in the amount of that percentage, the nominal price change of housing in that period lagged behind the general price increase of goods and services, as reflected in the (harmonised) consumer price index (HICP). Although the dynamics of Belgian house prices became more positive again in nominal terms since Q3 2023, real house price developments remained rather stable, with even some real price correction again in the first half of 2024. This is mainly explained by the back stronger overall HICP inflation, which peaked at 5.4% in June and July 2024. The combination of lower inflation again and strengthening house prices resulted in limited real house price growth again in Q3 2024.

Although the Belgian housing market held up well all in all, especially compared to a lot of other EU countries, there has been a price correction 'in real terms' in Belgium. This took place between Q3 2021 and Q4 2022 and amounted to a cumulative 7.6% (figure 3). This implies that, in the amount of that percentage, the nominal price change of housing in that period lagged behind the general price increase of goods and services, as reflected in the (harmonised) consumer price index (HICP). Although the dynamics of Belgian house prices became more positive again in nominal terms since Q3 2023, real house price developments remained rather stable, with even some real price correction again in the first half of 2024. This is mainly explained by the back stronger overall HICP inflation, which peaked at 5.4% in June and July 2024. The combination of lower inflation again and strengthening house prices resulted in limited real house price growth again in Q3 2024.

Alternative price data

The figures discussed above refer to the evolution of the harmonised house price index published by Eurostat on a quarterly basis. For Belgium, the series is calculated by the statistical office Statbel, which then provides it to Eurostat. The index is based on a methodology drawn up at the European level to ensure comparability between EU countries. Besides international comparability, this index also has the advantage of correcting for price changes resulting from changes in the characteristics of houses sold (year of construction, useful area, number of rooms, etc.). As a result, the harmonised index provides a good picture of the true underlying price dynamics in the housing market, independently of changing housing characteristics. KBC Economics therefore uses this index as a reference for its house price analyses and projections.

Besides the Eurostat series, there are alternative data that reflect the evolution of 'raw' (unadjusted) house prices. A first series concerns data also published by Statbel based on sales deeds registered by the FPS Finance (more precisely, the General Administration of Property Documentation). These are the median sales prices of houses (closed, semi-detached and open) and flats. An overall price index of all housing types together can then be obtained via the calculation of a transaction-weighted median price. A disadvantage of the series, which also applies to the harmonised Eurostat series, is that the figures refer to the registration of deeds, which usually takes place several months after the signing of the sales contract (the so-called compromise). Moreover, the figures become available quite late, about three months after the reference period.

The Notary Barometer of the Belgian Federation of Notaries (FedNot) does not have both these drawbacks. This is yet another data series of Belgian house prices based on data collected by notaries at the time of the signing of the compromise and supplemented by data from sales deeds. Moreover, because this series is available relatively quickly (as early as a few weeks after the quarter in question), it gives an early picture of developments on the housing market. Unlike the raw Statbel figures, which concern median prices, the Notary Barometer gives the average price of houses and flats. Again, an overall index of the two types can be calculated together, via the calculation of a transaction-weighted average price.

Like all the other data series already mentioned, the Notary Barometer has the disadvantage that it only goes back in time to a limited extent, making analysis over a longer period impossible. The longest time series, going back to 1973, is published by the European Central Bank (ECB) and provided by the National Bank of Belgium (NBB). It is a general composite index, with no availability of detail on housing types. As with the raw Statbel data and the Notary Barometer, only sales of existing homes are included. In that respect, all alternative house price data differ from the harmonised Eurostat figures which, in addition to an overall index, are also available broken down by existing and new homes sold (figure 2). Note that the Eurostat figures for new homes use the sales prices in the construction industry as a proxy.

Figure 4 brings together the available house price data. To maximise comparability, the Eurostat series, like the others, covers only sales of existing dwellings. The starting point (2010) is chosen based on the shortest available raw Statbel series. First of all, it is noticeable that, over the whole period, the harmonised (adjusted) Eurostat series increased less on balance. Most likely, the explanation is that in recent years proportionally more relatively recently built (i.e. also more sustainable, energy-efficient) houses have gradually been put on sale. In the other (unadjusted) series, the price rise partly reflects that average 'better' quality of property sold, which was adjusted for in the Eurostat series. Turning to the more recent quarters, it is notable that house price dynamics in the alternative series have remained weak for slightly longer, although they too show an acceleration for the latest available figure (Q3 2024).

2.     Housing market activity   

Sales and construction

The past cooling in the housing market had its origins in less favourable economic fundamentals. First and foremost was the sharp climb in interest rates. The ECB lifted policy rates sharply from the summer of 2022, which also pushed up long-term interest rates and, in their wake, mortgage rates. Between Q1 2021 and Q4 2023, average mortgage rates (weighted by the relative share of fixed versus variable rate loans) in Belgium rose by 2.5 percentage points. Furthermore, generally increased economic uncertainty and the temporary contraction of real disposable household incomes probably also played a role, against the background of sky-high inflation. In 2022, the year with HICP inflation at 10.2%, there was a 1.2% drop in real income in Belgium. However, this is less than in most other European countries, thanks to automatic wage indexation and relatively strong job creation in Belgium, and may explain why the Belgian housing market held up somewhat better relatively to those in the EU27. The fact that house price dynamics have picked up somewhat more recently is mainly because mortgage rates have fallen back (by 0.5 percentage points between Q4 2023 and Q3 2024). 

The cooling in the housing market was also reflected in a sharply reduced number of transactions (figure 5). According to Statbel data, the number of sales of existing homes in Belgium in 2023 was almost 15% lower than in 2022. For houses (-16.8%), the drop was larger than for flats (-9.6%). The number of building permits (new construction and renovation) fell sharply earlier. Its peak was reached in spring 2021. While the number of transactions of existing houses in the secondary market seems to have stabilised somewhat recently (apart from sometimes large short-term fluctuations), the number of building permits in the primary market continued to fall. In the first three quarters of 2024, sales of existing homes were 0.9% higher than in the same period a year earlier, the number of building permits 9.1% lower.

The reduced residential construction activity was also reflected in the volume of effective construction investment (new construction and renovation of dwellings) by Belgian households, as reflected in the National Accounts. These fell by as much as 11.2% between the peak in Q3 2021 and Q3 2024 (figure 6). It is notable that value added (in volume terms) in construction as a whole did still hold up relatively well. This is explained by the fact that the 'civil engineering and road works' subsector continued to support value-added growth across the sector as a whole. The construction of the Oosterweel connection in Antwerp, for instance, boosted the sector. This illustrates that we need to be careful with construction indicators, as they often include other construction activities besides residential construction.

High-frequency indicators

The cooling in the Belgian housing market was also visible in sentiment indicators. Producer confidence in residential construction, measured by the NBB's business cycle indicator, did hold up better than that for the whole economy for a long time (figure 7). Nevertheless, there was a trend deterioration after the peak in June 2021 until early 2024. Since then, the indicator remained rather stable. There was another pronounced monthly dip in September 2024, but this was followed by a visible recovery. More detail is only available for the rough construction of the whole of residential and non-residential buildings. This shows that the assessment of current activity but also of the order position improved somewhat in the last months of 2024. A similar picture also emerges in similar surveys of construction companies by the European Commission (figure 8). Despite back slightly more positive data, however, the indicators remain at a low level, not only compared to the peaks just before and after the pandemic crisis but also against their long-term average. 

That the situation on the Belgian housing market has improved somewhat in recent months is also reflected in indicators related to housing demand. For instance, the European Commission's confidence indicator that gauges Belgians' intention to buy or build a home recently rebounded slightly (figure 9). This applies to all ages, by the way, indicating that housing demand not only from young families (first-time buyers) but also from investors and older 'movers' is turning positive. The improvement in housing demand is also reflected in figures on the production of new mortgage loans (figure 10). These had fallen sharply since June 2022 but have been increasing again since spring 2024, although their level still remains well below the earlier peak.

3.     Housing market imbalances

Overvaluation

The question is to what extent the weakening of house price dynamics that has occurred since Q3 2022 has tempered the previous overvaluation in the Belgian housing market. The answer depends not only on recent price developments but also on the evolution of its main determinants (the so-called market fundamentals). Over- or undervaluation occurs when house price developments are no longer in line with what those fundamentals indicate. Often, demand factors, such as household income, mortgage interest rates and demographics, are mainly considered for the latter. However, measuring over- or undervaluation is a tricky task. The fact that different figures circulate is because there are different measures that are not all equally comprehensive.

The price-to-income ratio is a simple measure that relates house price movements only to that of households' disposable income. The reasoning is that this income is needed to build up a piece of equity for a mortgage loan but more so to provide sufficient repayment capacity. The current value of the ratio is compared with its long-term average, which is assumed to correspond to an equilibrium level. When the ratio rises too sharply above its long-term average, it is an indication that households' capacity to finance a home is diminishing. Calculated this way, the housing market was still well overvalued in Q2 2024 (36%), but much less so than in early 2022 (52%) (figure 11). Besides the weaker price dynamics, the decline in the measure has to do with the fact that nominal household incomes have risen sharply along with high general inflation via the automatic indexation of wages and social benefits.

Besides income, property affordability depends on the course of mortgage interest rates. This determines the repayment burden and thus the borrowing capacity of buyers. If we correct the price-to-income ratio to take account of the interest rate, we obtain the interest-adjusted affordability. This compares the annual annuity a mortgagee has to pay (both capital repayment and interest) with disposable household income. The more the annuity and income diverge, the greater the proportion of income used to repay the loan. As with the price-to-income ratio, this broader measure is expressed as percentage deviation from its long-term average. Due to the trend of sharp decline in interest rates, the overvaluation calculated this way was completely eliminated in 2019. With the monetary contraction and interest rate hike that followed since spring 2022, the overvaluation had risen again to 26% by the end of 2023, but the latest interest rate decline and income growth brought it down to 17% in Q2 2024 (figure 11).

Housing market valuation is also often approached from a broader econometric model. One thereby seeks a long-term mathematical equilibrium relationship between house prices and their fundamentals. Besides household income and mortgage interest rates, these are usually demographics (number of households) and changes in the structural characteristics of the housing market (such as property taxes). The extent to which the effective price trend deviates from the equilibrium value calculated by the model (i.e. the disturbance term in the regression equation) can then be seen as a measure of overvaluation. According to KBC Economics' demand-driven model, the overvaluation thus quantified was 12.5% in Q3 2023. Since that peak, the overvaluation has gradually declined and even almost disappeared (0.4% in Q2 2024, figure 12). According to a similar modelling approach by the ECB, which is more rudimentary, the Belgian market was even marginally (by 4%) undervalued in Q2 2024.

Debt position

Besides the measurement of overvaluation, risks in the housing market are usually also estimated based on the evolution of the household debt position. Belgium is one of the European countries where mortgage debt increased the most in the past two decades. Related to their disposable income, the total debt of Belgian households, which consists predominantly of mortgage loans, has been above the euro area average since 2015. However, its rise has been reversed in recent years. In the second quarter of 2024, the debt ratio was rounded to 96%, coming from a peak of 107% in early 2021 (figure 13). The reversal is explained by the combination of much weaker mortgage lending and, above all, solid growth in nominal incomes following high inflation.

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Debt is only a problem if it can no longer be repaid. Despite the still relatively high debt ratio of Belgian households, mortgage defaults remain very low (figure 14). This is partly explained by the persistently low unemployment rate in Belgium (below 6%) and responsible lending. Moreover, the more cautious attitude of lenders has not prevented the share of young households in new mortgage lending from increasing somewhat in recent years (see Financial Stability Report 2024, NBB). 

4.    Housing market outlook

Price forecast

An unbalanced housing market (i.e. solid overvaluation and/or excessive debt accumulation) poses risks and could fuel a downward price movement in the housing market. The analysis above shows that the Belgian housing market is not in such a state. The cooling that has occurred in the Belgian market has mitigated those risks. This implies that, from that angle at least, we have much less to fear for a potentially serious house price correction sometime in the future. In this sense, the past cooling was a 'desirable' scenario. Over the next few years, the price dynamics in the housing market will rely mainly on the evolution of the traditional market fundamentals. Essentially, these are interest rates, household income, demographics, taxation and housing supply.   

Specifically, KBC Economics assumes that Belgian house prices (according to the harmonised Eurostat definition) will continue to rise moderately by some 3% per year in both 2025 and 2026, after an estimated increase of 3.1% on average in 2024. In the somewhat longer term, we see house price dynamics picking up slightly to 3.5% a year. This is roughly in line with expected nominal GDP growth. Also in the past, house price dynamics showed a reasonable correlation with the annual growth dynamics of gross domestic product (GDP) (figure 15). The fact that price increases are unlikely to be as sharp in the longer term as they often were in the past is also in line with the lesser price pressure that will emanate from demographics. The Federal Planning Bureau sees the number of households, and thus the additional housing need, continuing to increase in the coming years, but to a lesser extent (figure 16). 

Uncertainties

Price pressure in the housing market remains difficult to predict because of uncertain factors. One of these is the extent to which the supply of additional housing will meet future housing needs. In this respect, it is notable that since 2023, the number of housing units has stopped growing more than the number of households (figure 17). From 2012 to 2022, this was the case and, overall, the supply of housing adapted well to demographic trends, and thus to the need for additional housing. A stronger-than-expected reversal in the ratio of housing units to households could lead to greater price pressures in the housing market than predicted above. Today, there are a lot of frictions in construction that prevent flexible supply (strict regulations, stringent requirements, long procedures...). They create an inelastic supply and often make new construction or renovation more complex and expensive. Another constraint in construction, which has played a role in the past and can also drive up prices, are shortages of building materials and labour. There is indication in surveys that the situation on that front deteriorated somewhat again at the end of 2024 (figure 18).  

Another uncertainty concerns future taxation around real estate. Should the government, in the context of the budget consolidation and/or a tax reform, make major changes to housing taxation, this could affect activity and pricing in the housing market. The already decided reduction of registration duties in Flanders and Wallonia from 2025 could already boost buying activity, but, if supply does not follow and the market tightens, could ultimately result in a proportional increase in house prices. The energy efficiency of housing is also likely to remain a price determinant in the coming years. Nevertheless, the extent to which price dynamics will differ between energy-efficient and non-efficient dwellings remains uncertain. Indeed, the different price dynamics are influenced by the abolition (in Flanders) of the plan to further tighten renovation obligations from 2028 and by possible changes in environmental legislation.

Disclaimer:

Any opinion expressed in this publication represents the personal opinion by the author(s). Neither the degree to which the hypotheses, risks and forecasts contained in this report reflect market expectations, nor their effective chances of realisation can be guaranteed. Any forecasts are indicative. The information contained in this publication is general in nature and for information purposes only. It may not be considered as investment advice. Sustainability is part of the overall business strategy of KBC Group NV (see https://www.kbc.com/en/corporate-sustainability.html). We take this strategy into account when choosing topics for our publications, but a thorough analysis of economic and financial developments requires discussing a wider variety of topics. This publication cannot be considered as ‘investment research’ as described in the law and regulations concerning the markets for financial instruments. Any transfer, distribution or reproduction in any form or means of information is prohibited without the express prior written consent of KBC Group NV. KBC cannot be held responsible for the accuracy or completeness of this information.

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