Press release - House prices and economic growth in Belgium
The economic and financial crisis of 2008 and the following years has shown the importance of the housing market for the financial stability and the economic growth. The subprime mortgage crisis in the United States since 2006 is in fact considered as one of the elements that triggered the Great Recession, while the bursting of the housing bubbles in Spain and Ireland has caused and propagated an important slowdown in economic activity in the euro area. This article discusses the evolution of house prices in Belgium and their importance for the economic activity, in particular the private consumption, the residential investment and the financial stability. The Belgian results are also compared with those from several other advanced countries.
House prices have been rising steadily in Belgium over the previous decades. Prices only decreased during two periods: a first period during the first half of the 1980s and a second period, which was shorter and where the decline was limited, during the economic and financial crisis of 2008 and subsequent years. The rise in residential property prices also led to a substantial increase in the households’ real estate wealth, which amounted to more than € 1,400 billion in 2016. A large part of the increase in property prices during the last 45 years could be attributed to the sharp rise in land prices, especially in the Flemish Region, where the relative scarcity of building plots increased, particularly since the beginning of the 2000s. In addition to demographic pressures, which were reinforced by the gradual decline in average household size, the growth in residential property prices was also supported by various macroeconomic factors such as the pronounced fall in mortgage interest rates, which, combined with the increase in household income, ceteris paribus, made houses more affordable. Moreover, taxes on real estate generally changed in such a way that they increased access to mortgage credit and housing demand.
House prices can have an impact on private consumption through several channels. First, a rise in house prices leads to an increase in the real estate wealth of homeowners, who would consequently consume more. However, this positive wealth effect is partly offset by the fact that higher house prices also lead to a higher purchase price for future buyers, who consequently would have to save more to be able to buy a certain dwelling, and to higher expected future rents, which can have a negative effect on the consumption of tenants. In addition, certain credit products that can be used for consumption purposes and that have the residential property as collateral can reinforce the positive effect of an increase in house prices on consumption. The results of an econometric model for consumption, which was estimated for several advanced countries, indicate that the impact of house prices on consumption is mainly large in countries where these credit products are frequently used, such as the Netherlands and the United Kingdom. For Belgium, where these credit products are barely used, the estimated effect of house prices on consumption is smaller, although it is still larger than what was found in previous studies.
House prices can also influence investment in new dwellings, which constitutes the biggest component of the residential investment. An increase in house prices implies that new dwellings could be sold at a higher price, such that, assuming building costs remain unchanged, investment in new dwellings would become more profitable. Previous empirical estimates in the literature nevertheless show that, in comparison to the United States and the Scandinavian countries, the impact of house prices on residential investment is very small in West European countries, including Belgium. That could in part be explained by the high population density and the relatively heavy regulation governing procedures to obtain a building permit in these countries. Moreover, housing demand shocks in these countries would mainly lead to adjustments in house prices and only to a lesser extent to fluctuations in economic activity.
Finally, house prices can also have an influence on the financial stability. Earlier empirical studies have in fact shown that house price bubbles, especially when combined with rapid credit growth, increase the risk of a banking crisis and in addition can lead to much deeper and more protracted recessions. According to the current estimates of the NBB’s valuation model, house prices in Belgium are only slightly overvalued, which seems to indicate that there is no bubble in the housing market. The main reason for remaining vigilant to developments in the housing market in the context of macroprudential policy is related to the evolution of the Belgian household debt, which mainly consists of mortgage debt. This has increased almost continuously over the last ten years, while it has been decreasing in the euro area as a whole. In addition, the mortgage loans contain vulnerable segments – where households have borrowed a relatively large amount in relation to their income and liquid assets –, which could result in a higher-than-expected number of defaults in the event of a large negative economic shock. Since the value of the house for a large part of these mortgages is not much higher than the outstanding debt, banks could in that case suffer large losses, especially if there were also a sharp fall in house prices. In this context and in view of the large share of mortgage loans in the balance sheet of Belgian banks, the National Bank of Belgium has taken macroprudential policy measures since 2013 to make banks more resilient to unexpected losses on their mortgage portfolios.