Luxembourg’s reputation for excessive house prices is facing macroeconomic clouds looming over European and international housing markets. However, several country-specific factors will likely minimise the price drops seen in other markets, including tax measures, cheaper housing across the border, and a small development community.
The news about housing has been negative for owners and investors in recent months and has become more positive for buyers. House prices are falling in many Western markets as mortgage rates continue to increase. Investment bank UBS called it “game over” for owner-occupied housing. But nobody paid much attention to tiny Luxembourg.
Game over
Those interviewed by Investment Officer about Luxembourg’s house prices said they don’t expect much in the way of price corrections. Today, explained Laurent Zahles, a member of Banque Raiffeisen’s management board, many potential buyers are putting off purchase decisions. However, due to the historic shortage of housing, “we think that we won’t be seeing substantial widespread price corrections.” The long-standing shortage has been aggravated by the impact of inflation as well as supply chain issues and labour shortages.
Variable interest rate mortgages are a factor driving house price declines, with mortgage owners exposed to risking mortgage interest rates, increasing their monthly repayments. Countries with higher proportions of variable rate interests and an oversupply of housing are seeing the largest price declines.
Banque Raiffeisen, which has a large portfolio of local mortgage loans, said that while Luxembourg has traditionally opted for variable rates, more recently, clients making a mortgage loan request “often opt for a mix between fixed and variable rates,” said Zahles.
About half of Luxembourg mortgages are variable rate, according to Luxembourg’s central bank. “This situation could constitute a lever increasing the risk of insolvency of certain households, especially during a rapid increase of rates on the monetary markets,” the BCL said in its 2022 financial stability review.
Variable preference
Most of Luxembourg’s small number of mortgage-issuing banks have been pushing clients towards fixed rates for at least part of their mortgage over the past decade, said Julien Licheron, a research fellow at Liser, the Luxembourg institute of socio-economic research. Since 2014, this effort has substantially increased the fixed portion in this country, according to the BCL.
The major effect of the recent macroeconomic developments here is to even further suppress the already limited annual new housing supply, identified as the culprit for relatively high prices during most of the past 20 years. Projects are being put on hold or delayed by construction supply problems and rising costs.
Luxembourg house builders seem to find it difficult to build enough houses, frequently blaming local approvals procedures. Between 1 and 3,000 housing units were built yearly, reaching a peak of 4,444 in 2008. National statistics organisation Statec has projected the need for 6,000 to 8,000 new housing units per year to meet demand
Management of land
Antoine Paccoud, a research scientist at Liser, said most housing here is produced by a couple of big developers and the small country is difficult to enter for international developers. He said he believes there’s some “management of land reserves to ensure that not too many housing units arrive on the market.”
An average house in Luxembourg cost 724,342 euros in 2015, rising to 1,379,694 euros by mid-2022, according to Observatoire de l’Habitat data. Prices are higher in the capital city and nearby suburbs, reaching well over 2 million according to the latest 2022 data.
Moreover, in recent years, housing prices have spiked. “Since 2017, we have seen an (annual) increase of about 12 to 15%”, said Licheron. “That’s a really huge increase and we have no explanation.”
Housing reform under way
Luxembourg is introducing a new property tax regime which will penalise holding land inactive in order to make land available for building.
To Paccoud, the lack of such a tax is one of three distinctive elements in Luxembourg’s market. The others are the lack of inheritance tax on direct line transfers and the tiny amount of social housing in the country.
Luxembourg, Paccoud explained, “has a sort of safety valve”. “All the people who can’t afford to buy in Luxembourg are pushed to the neighbouring countries … where prices are two to three times cheaper,” but commuting is arduous.
University of Luxembourg researcher Tom Becker said now Luxembourgers know not only new arrivals face housing difficulties, pressure for political change is rising.