Are we heading toward a real estate bubble?

Thomas Valkeniers - Housing has become more expensive in recent years, to the point that in recent months people have been talking about “unaffordable housing.” However, that does not mean we are in the midst of a real estate bubble and that prices are about to collapse. Expensive or unaffordable housing primarily affects the rental market and may lead to a correction in sales prices. A real estate bubble implies a significant overvaluation of prices and a decline in demand. “Unaffordable housing” therefore does not lead to a “real estate bubble.” These are two distinct concepts.

What is a real estate bubble? 

We regularly hear or read that Belgian real estate is overvalued and that we are on the verge of a real estate bubble. A“real estate bubble”is an economic phenomenon in which the appraised value of real estate rises until it reaches an unsustainable level relative to financing costs and/or returns. This is inevitably followed by a rapid decline in value, accompanied by a drop in demand and all the financial consequences that entails. So, when real estate prices rise too quickly, they could suddenly plummet if they are no longer in line with income, financing costs, and/or returns. That is not the case in Belgium, nor is it being driven by “unaffordable housing.”

Why is there a real estate bubble? 

Why does the term “real estate bubble” keep popping up in the media? Since the significant rise in real estate prices beginning in 2000, we’ve seen this term appear regularly in the media. Generally speaking, we can say that real estate has performed quite well over the past century , despite a few major crises. The significant price increases of recent decades have, of course, attracted additional capital from other markets that compete with the real estate market. It is largely from these competing markets that the risk of a “real estate bubble” has been repeatedly highlighted.

Belgian real estate: a stable investment 

After all, even when viewed over the past 100 years, the Belgian real estate market has amply demonstrated that it is a safe bet. Crises have done nothing to change that. Even when the real estate markets in other European countries were hit hard by crises, the Belgian market held its ground. There is a very simple explanation for this, thanks to our Belgian tax system. 

When you buy real estate in Belgium or Flanders, you pay registration fees ( known as sales fees in Flanders) in addition to the purchase price. These fees typically amount to 12%. Therefore, when you buy real estate, the intention should be to hold onto it for at least a few years. After all, if you sell quickly, the registration fees are lost and are usually not offset by any increase in value the property may have experienced. This ensures stability in the real estate market. 

In a market where no registration fees are payable on the purchase price, you often see that when real estate prices begin to fall slightly, this creates a snowball effect, leading many owners to suddenly decide to sell their properties out of fear of incurring a loss. As a result, there is an increase in supply in the short term, leading to a sharp drop in prices. This is a real estate bubble bursting. That risk is therefore rather limited in Belgium.  

Consequently, Belgian real estate is not suitable for short-term speculation. Our Belgian real estate is purchased as an investment with the aim of holding it for many years. As a result, our real estate market is not volatile and remains stable.

Is housing too expensive? That’s another issue. 

When people say “housing is becoming too expensive,” they are referring to an entirely different phenomenon that has no connection to a “real estate bubble.” At its core, the problem can be traced back to a shortage of supply, particularly in the rental market. The causes are varied. On the one hand, there is rising demand, and on the other, the rising cost of real estate.

First of all, changes in the demographic composition of the population have created a need for additional housing. We are seeing an increase in the number of single-parent families as a result of rising divorce rates and the decline of the traditional family. The aging of the population is also a factor. All of this is leading to an increase in the number of single-person households. According to the Federal Planning Bureau, the number of single-person households will increase by 40% by 2060.

Added to this is the demographic boom. The Federal Planning Bureau forecasts that Belgium’s population—which stood at 11.1 million in 2013 and is currently 11.7 million—will continue to rise to 11.9 million as early as 2030 and even 12.5 million by 2060. The increase in demand will therefore be significant.

Furthermore, the cost of real estate is higher today due to rising construction costs, stricter insulation standards, and higher interest rates. The slow permitting process, which sometimes forces developers to wait up to seven years for a permit, also drives up costs. As a result, projects in particular have becomeprojects more expensive . It is now more difficult to make an investment in a projects rental projects profitable. Consequently, since construction costs and interest rates have risen, there are significantly fewer investors in that market. The introduction of the government bond by our government does not help this situation. Yet real estate investors are needed to ensure sufficient supply in the rental market.

Owners of existing investment properties are also being required to incur additional costs to ensure their buildings meet minimum energy performance standards. Many investors are unwilling to bear these costs and are putting their rental properties up for sale. As a result, a significant number of rental properties are currently being withdrawn from the market. The overall supply in the rental market is thus declining while demand is rising sharply. This naturally leads to sharply rising rents and “unaffordable housing” for certain categories of tenants. It has also caused the number of rental transactions to drop by 30% in recent months.

Government intervention and solutions

Housing has indeed become significantly more expensive today, and for some groups, it has become unaffordable or even impossible to find. The government could lend a helping hand by relaxing building permit policies or, if necessary, lowering the 21% VAT rate. There is also a call to review and relax energy measures or spread them out over time. For some families, financial incentives or subsidies will always be necessary .

But it’s not because “housing is expensive” that it’s supposedly unaffordable or that a real estate bubble is about to burst. Demand for real estate remains steady and is increasing. Interest rates have indeed risen recently, but they are still extremely low compared to, say, 20 or 30 years ago. The 20% down payment that banks require today when granting a loan was also the standard back then. Borrowing is therefore not extremely expensive and, in fact, remains affordable. Due to rising prices and higher renovation costs, the average buyer today does have to borrow more compared to a few years ago. This can be offset by extending the loan term to 30 years, or even to 50 years, as has long been the case in some European countries. It’s a matter of making choices. You simply can’t expect real estate to increase in value, be of higher quality, better insulated, and more energy-efficient, while also becoming cheaper to live in. So we have no reason to fear a Belgian real estate bubble.