Does Belgian residential property offer a hedge against inflation?

Abstract

This study examines the potential of Belgian residential property to act as an effective hedge against inflation. Although property is often perceived as a safe investment capable of preserving the value of wealth in the face of economic fluctuations, this research fills an important gap in the literature by focusing specifically on the Belgian market, a subject that has been little explored until now. The analysis covers data from 1992 to 2023, divided into two distinct periods: 1992-2010 and 2011-2023. Different econometric models have been used to assess the relationship between property yields and different types of inflation, actual, expected and unexpected. In addition, dummy variables were included to analyse the impact of periods of high inflation and recession. Robustness tests, including the Harmonised Index of Consumer Prices (HICP), the Health Index, the inclusion of lagged variables, as well as a cointegration test to analyse long-term relationships, were carried out to check the reliability of the results. The results show that Belgian residential property is not always an effective hedge against inflation. This effectiveness varies according to the period, the region and the type of property studied. For the period 1992-2010, only flats in Brussels provide protection against actual inflation. And only villas in Wallonia offer protection against expected inflation. In contrast, for the period 2010-2023, houses with 2 or 3 facades in Brussels offer protection against actual inflation, while similar houses in Flanders offer protection against expected inflation. These observations suggest that the effectiveness of real estate as a hedge against inflation in Belgium is highly dependent on the temporal and regional context. The robustness tests confirm several conclusions of the basic model, particularly with regard to the protection offered by houses in Flanders against expected inflation over the period 2011-2023. However, the inclusion of lagged variables in the analysis has revealed new dynamics, suggesting that the Belgian housing market may react with some delay to inflationary pressures. This study makes a significant contribution to the existing literature by filling an important gap on the link between inflation and residential property in Belgium. It highlights the importance of taking into account regional differences and the potential impact of economic cycles on property yields. The results provide valuable insights for policymakers, investors and players in the Belgian property market, shedding light on the role of property as a hedge against inflation. In conclusion, although residential property in Belgium does not offer universal protection against inflation, certain segments and regions show varying levels of protection. These results highlight the complexity of the property market and the need for further research to explore the nuanced relationships between inflation, economic cycles and property returns.