Coronavirus, Real-Estate & Banks: an analysis

By Justin Lepinne, Project Analyst, Intys FSA

· INSIGHTS

Many things may have gone wrong in the last decade but certainly not the expansion of the economic activity which has grown every year by 2.978% in average since 2010 (data Banque Mondiale). Sad to say but this is unlikely to happen for 2020. The abrupt appearance of the Covid-19 pandemic will most likely reverse the current trend as the virus constrained many countries to put in place lockdown measures to preserve the public health at the expense of the economy.

Likewise, the collapse of the economic activity can have a major impact on the real estate market in Belgium. Up to now, the Belgian government is supporting the companies and the households going through the crisis with measures such as the partial unemployment. Real estate not being an exception, the prices are driven by the laws of supply and demand and on the long run, it is likely that some people will lose their job and have lower revenues negatively impacting the demand. At the same time, some other people will be unable to pay off their mortgage which will lead to an increase in supply.

This is beyond a doubt a positive news for everyone looking at becoming a property owner, but this is as well very risky for banks which will need to monitor closely the future of the real estate market. If remembering how the 2008 financial crisis initially began is probably unnecessary, it is imperative to highlight that this time, there are two significant differences. First, it is expected that financial institutions learnt their lessons and second, banks were the cause of the previous crisis while this time they need to be the solution.

Over the past few years, a more prudent crisis management together with more supervision and regulation have forced banks to accumulate more capital buffers to prevent future systemic risks. One of these is the countercyclical buffer (CCyB) which can be considered as a credit buffer. This macroprudential cushion has just been fully released by the National Bank of Belgium to allow banks to use this extra capital to absorb any potential loan losses and keep playing their role of source of credit while maintaining a satisfying level of liquidity on the market.

On the other side, it is worth underlying that the interest rates remain extremely low while the equity market is highly volatile and uncertain. This is for sure maintaining a high level of attractiveness for some investors.

In conclusion, it is still a too early stage to assert how the coronavirus crisis will affect the Belgian real estate market but there is no doubt that over the next few months banks and financial authorities will need to monitor the situation very closely.

More info available in the Financial Stability Report.

By Justin Lepinne, Project Analyst, Intys FSA