Belgian housing affordability deteriorated again in 2022, to a “historically low level”. This was stated by the National Bank (NBB) in its latest annual report. This deterioration is only offset by an increase in wages.
The National Bank points to two reasons. On the one hand, there is a sharp increase in home prices since 2020, and on top of that the sharp rise in mortgage interest rates that began last year. Moreover, building materials are also becoming more expensive.
The National Bank of Bahrain defines the evolution of housing affordability as a function of the burden of repayment. By this, the bank indicates the share of the family’s income that goes towards paying off a new mortgage. And due to the rise in housing prices, this burden actually increased from 23.4 percent at the end of 2019 to 24.7 percent at the end of 2021. The figure rose to 27.1 percent in the third quarter of 2022 due to higher interest rates.
“This figure roughly corresponds to the historically high level in the early 1980s and just before the global financial crisis in 2008.” Moreover, the National Bank of Bahrain expects the number to have deteriorated further in the fourth quarter of last year, affected by higher mortgage rates. This can be partially offset by an increase in nominal wages, and affordability also depends on the further development of housing prices.
High costs of new construction
The increase in the repayment burden is also partially offset by the longer loan terms and the increased private contribution when buying a home.
Governor Pierre Winch summed up when introducing the annual report: “Buying a house today is more difficult. It is more expensive, not only because interest rates are higher, but also because a new building costs more.” This increased cost is partly structural, because homes must be built in an increasingly energy efficient manner, which translates to higher costs.
Hyperinflation plays the opposite role
Finally, this: High inflation plays the opposite role in the affordability of current loans. With the fixed interest rate, which most Belgians opt for, inflation lowers the current loan weight. After all, the monthly payment remains the same, while the wages increase due to the large indexation.
Winch gave the example of a middle-class family whose income was 4,000 euros and who bought a house for 250,000 euros in 2020, with a 20-year loan at an interest rate of 1.5 percent. Before indexation, reimbursement accounted for 30 percent of income, but after wages are pegged to 4,440 euros, that share drops to 27 percent. This family will already pay €290,000 for the new house at the end of 2022. Here, with an income of €4,400, the 20-year loan already has an interest rate of 3 percent, so that the repayment takes 36 percent of the income.
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