The mortgage market contracted significantly this year. In the first 10 months of this year, 17% fewer mortgage applications were processed at banks and other home lenders, De Standaard reports.
This contraction of the housing loan market has only compounded throughout the year. In January, the number of applications was 11% lower than the previous year. By October, the market shrank by 28% compared to the same period last year.
As inflation soared across Europe (peaking at over 12% in Belgium in October) central banks committed to significant rate increases, decreasing the attractiveness of credit and raising interest rates at European banks. Consequently, mortgages are much less favourable than they were a few years ago.
Little surprise given that mortgage rates more than doubled this past year. A 20-year fixed-rate loan covering less than 80% of the value of the average home, started the year with an interest rate of 1.38%. A 29 December, interest rate barometer published by Immotheker Finotheker values the same loan at 3.36%.
Energy renovations
According to De Standaard, for every 1% interest rate increase, the buyer's borrowing capacity decreases by around 10%. As a result, someone buying a house in December 2022 can now borrow 20% less than someone buying a house a year ago.
Even accounting for Belgium's wage indexation system, which adjusts salaries according to inflation, most households have seen their borrowing capacity decrease. This year, wages rose by up to 11%.
Mortgage applications have also fallen due to stricter regulations around energy efficiency. Starting this year, Belgium introduced an obligation to renovate homes ranking especially poorly (E or F EPC rating) to at least D or better.
In offering mortgage loans, banks are now taking this into account. As the property serves as collateral for the loan, banks are less likely to offer loans to those who cannot afford the necessary renovations. Immotheker Finotheker says that these renovation costs can reach up to €50,000, especially for renovations seeking to move homes to A or B ratings.
The impact of this new consideration on borrowing capacity is huge, especially considering that almost half (49%) of Belgian homes have an E or F rating.
“Interest rates and energy ratings are the main factors behind the drop in demand,” John Romain, from Immotheker Finotheker, told De Standaard. “There are simply fewer buyers coming into the market.”
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This trend is likely to continue, Romain believes. The European Central Bank continues to use all available monetary tools to battle against inflation, which will push up long-term interest rates and mortgage interest rates. Despite a drop in total inflation in Belgium, core inflation continues to rise in the Eurozone.
If interest rates rise another percentage point, a further 10% of lending capacity will likely be lost: bad news for the bottom end of the property ladder, Romain says. As is all too common, while the top end of the market is doing well, the bottom end is increasingly struggling to borrow. Paired with a decrease in loans for new builds, this will only cost housing for young families and low earners.
