After several years of historically low mortgage rates, they soared last year to 4%, before falling back to around 3% today. How will they evolve from now on, and what does this mean for the property market?
The unprecedented surge in mortgage rates since mid-2022 has not been without consequences for the property market. What should investors expect from now on, and how should they approach the market?
It is generally accepted that two major factors have a mechanical influence on property prices:
- Growth in economic activity/purchasing power (as measured by the employment/unemployment rate)
- Changes in interest rates on the mortgage market, which raise the bar for access to home ownership, determine the financial power of buyers and make competing allocations (investments in term deposits, bonds, etc.) more or less attractive compared with property.
These rates depend largely on those of the European Central Bank (ECB), which directly influence the bond and credit markets in the eurozone.
After a long period of extremely low interest rates (which have even gone into negative territory), central banks had to raise their key policy rates spectacularly (10 times in a row between July 2022 and September 2023) to reduce an out-of-control inflation.
As a result, 20-year-fixed mortgage rates, which were hovering between 1% and 2% in Belgium at the end of this very favourable period for borrowers, jumped to 4% or even 5% last year, causing a 15% fall in the number of transactions and of prices on the property market.
Today (mid-July 2024), they returned to a much more attractive level of around 3%, in anticipation of the first rate cut by the ECB, which took place on 6 June (deposit rate cut by 25 basis points to 3.75%), a little earlier than expected, and in the hope that this bearish move will continue in the coming months, as inflation finally seems to be more or less under control.
What about the next few months?
- The financial markets (futures contracts and economists' expectations) are now betting on a series of 25 basis points cuts in key rates, which would amount to a total fall of 1% between now and the end of 2024. The ECB's deposit rate, which was still 4% at the beginning of June, would therefore fall to 3%.
- For the future, expectations diverge further, with analysts expecting a deposit rate of between 1.50% and 2.75% by mid-2025.
- These projections have already been partly taken into account by Belgian commercial banks. Belgian government bonds (OLOs) are the main instrument they use in their mortgage offers. The Belgium 10 Year Government Bond fell from a peak of 3.62% on 23 October last year to a low of 2.51% on 21 December 2023, only to rise back to 3.13% on 13 June 2024.
- In any case, few observers anticipate a fall back to very low mortgage rates of around 1% or 1.5%, even in the longer term, believing that this was an abnormal situation at the time. More reasonably, they expect rates to stabilise at around 3%, or even slightly below this level, given the expected cuts by the ECB.
- It should be noted that in the event of significant changes in interest rates, the property borrower-investor is, in a way, always a winner: if he has locked his rate and rates subsequently rise, he is protected; and if rates fall (by at least 1% in order to absorb the costs of refinancing), he can always renegotiate his rate or change bank by paying a funding loss (3 months' interest for individuals and 6 months' interest for businesses).
Conclusions for the property market
- Sector professionals are expecting a return of liquidity to the financial markets from the second half of 2024, what could lead to a better balance of expectations between buyers and sellers and a gradual return of large institutional investors to the property market.
- With inflation back down to acceptable levels and prices having fallen by around 15% following the sharp rise in interest rates and without having risen again, we are at the bottom of the price wave, with a balance of power more favourable to buyers than in the past. With the sharp rise in rents (see our article on this subject), the next few months look particularly favourable for property investments, and all indications are that actual returns will be boosted as a result.
- However, there is a countervailing force at work: the growing constraints on energy efficiency, which investors will have to take into account if they are interested in discounted energy-intensive properties. Not only because these properties will eventually need to be renovated, but also because banks will soon be offering different rates depending on the PEB certificate.
- In terms of property categories, the retail sector is enjoying a kind of revival following the pandemic (shopping centres and city-centre shopping streets); student housing, flats and mixed-use projects are in strong demand; and office buildings will clearly continue to struggle for some time to come.