The Unassuming Economist

House prices are overvalued by “5–15 percent” according to a new IMF report on the Belgium economy. The report says that  “Risks of a sharp correction of real estate prices appear contained. Property prices have risen by 110 percent in real terms since 2000, and, unlike in other EU countries, continued to increase through the financial crisis. Overvaluation estimates range from 10–60 percent, but valuation estimates based on price-to-income and price-to-rent ratios often miss catch-up effects. A finer assessment (interest-adjusted affordability regression analysis) suggests overvaluation of 5–15 percent. In fact, absolute prices remain moderate by European comparison. High ownership rates (around 70 percent), coupled with persistent housing shortages, are likely to prevent a rapid price decline. Robust household balance sheets, the prevalence of fixed interest rate mortgages, and the recent tightening of capital requirements on mortgage lending should limit the impact of an interest rate and/or unemployment shocks on the quality of the mortgage portfolio. However, the prevalence of fixed-rate mortgages shifts the interest rate risk to banks.”