Stable demand and limited supply
Maria de Guzman | March 04, 2022
Luxembourg's residential property prices continue to rise, amidst stable demand and limited supply. During the year to Q2 2022, the average selling price for apartments rose by 9% (1.8% inflation-adjusted) to €8,995 (US$9,337) per square metre (sq. m), according to the STATEC Luxembourg, the country's national statistics agency.On a quarterly basis, nationwide apartment prices increased 3.2% (0.6% inflation-adjusted) in Q2 2022.
“In the Luxembourg canton alone, the average price for a house was almost double the price of an equivalent property in the north. The supply side, although anticipating the demand expansion, was not able to keep up with it, causing upwards pressure on houses prices,” said the European Mortgage Federation in its 2022 Hypostat report.
By property type:
- Existing apartments' average acquisition price increased 8.2% (1% inflation-adjusted) y-o-y to €8,799 (US$9,161) per sq. m. in Q2 2022. Quarter-on-quarter, prices rose by 2.4% but declined slightly by 0.2% when adjusted for inflation.
- New apartments' average price rose strongly by 9.6% (2.3% inflation-adjusted) y-o-y to €9,472 (US$9,857) per sq. m. over the same period. On a quarterly basis, prices increased 5.7% (3% inflation-adjusted).
Demand for residential properties is more or less steady. During 2021, the total number of apartment transactions was almost unchanged from a year ago, at 6,836 sales, based on figures from STATEC Luxembourg. Though, the value of sales actually increased 9.6% y-o-y to €4.46 billion (US$4.63 billion) last year. In the first half of 2022, the number of transactions fell by 4.5% while sales value increased 2.8%.
Aside from domestic demand, foreign homebuyers also buoy the housing market. Foreigners can freely buy property in Luxembourg.
Despite the healthy demand, residential construction activity remains weak. In H1 2022, the total number of dwellings with approved building permits fell by a huge 36.5% to 2,021 units as compared to the same period last year.
During 2021, Luxembourg's economy grew by 5.1% from a year earlier, a strong rebound from a 1.8% contraction in 2020 and far higher than the annual average growth rate of 2.6% in 2010-19. However, the economy is projected to slow again due to a decline in investment, in particular in construction, and a decrease in private consumption and exports. Based on the recent projections released by the European Commission, the economy will grow by just 1.5% during 2022. This is not far from the International Monetary Fund's estimate of a 1.6% expansion this year.
Analysis
of Luxembourg Residential Property Market »
Moderate rental yields on residential property in Luxembourg
In Luxembourg, the gross rental yields on apartments - the return earned on the purchase price of a rental property, before taxation, vacancy costs, and other costs - range from 4.25% to 5.15%.
We have given you rental yields for Luxembourg as a whole, because unfortunately we weren't able to gather data for the city centre (the number of rental offers that we found was too small).
Our research shows that rental yields are somewhat higher on smaller apartments. Yields on the very smallest apartments are 5.15%, which is reasonable for such a prosperous country. But then smaller apartments tend to need more maintenance, so a higher yield is justified.
Rental yields on houses are lower, ranging from 3.8% to 4.5%. For houses there is little relationship between size and rental return.
Prices per square metre range for apartments in the city centre itself range from around €7,900 to €8,900 per square metre (sq. m.). Prices for apartments further out can be as low as €4,500 per sq. m. Prices in the Grand Duchy for houses range from around €3,600 to €4,000 per sq.m..
Round trip transaction costs are high in Luxembourg, by European standards. See our Property transaction costs for Luxembourg and Property transaction costs in Luxembourg, compared to the rest of Europe.
High taxes despite tax-haven reputation
Rental Income: Rental income is taxed at progressive income tax rates ranging from 8% to 42%.
Capital Gains: If the property is held for more than two years, capital gains tax rates are reduced to a maximum of 22.89%.
Inheritance: Inheritance of the spouse and children are exempt from taxation.
Residents: Residents of Luxembourg are taxed on their worldwide income at progressive rates, from 8% to 40%.
Buying costs are moderate in Luxembourg
Total roundtrip transaction cost, i.e., the cost of buying and selling, is between 12.21% and 16.41%, inclusive of registration fees (6% to10.2%) and estate agent's commission (3% plus 17% VAT).
Luxembourg has strong tenant protection laws
Luxemourg's rental market is strongly pro-tenant.
Rent: Rent control limits the amount of returns a landlord can receive. Rent can only be increased every three years.
Tenant Security: If evicted, the tenant is usually awarded generous compensation and more than sufficient time to look for an alternative dwelling.
Economic growth to slow again
During 2021, Luxembourg’s economy grew by 5.1% from a year earlier, a strong rebound from a 1.8% contraction in 2020 and far higher than the annual average growth rate of 2.6% in 2010-19.However, the economy is projected to slow again, due to a decline in investment, in particular in construction, and a decrease in private consumption and exports. Based on the recent projections released by the European Commission, the economy will grow by just 1.5% during 2022. This is not far from the International Monetary Fund’s estimate of a 1.6% expansion this year.
“Real GDP growth is projected to slow down to growth rates of 1.5% in 2022, 1% in 2023 and 2.4% in 2024, affected by weaker domestic and external demand, and high uncertainty surrounding consumers and investors’ behaviour,” said the European Commission.
From 1999 to 2007, Luxembourg enjoyed robust economic expansion, with an average annual GDP growth of 5.2%. After declining by 3.2% in 2009 due to the global financial crisis, the economy has been continuously growing modestly from 2010 to 2019.
The labour market remains resilient. In October 2022, the overall unemployment rate stood at 4.8%, down from 5.3% a year earlier and 6.3% two years ago, according to the STATEC Luxembourg. Overall unemployment is projected to fall further to 4.7% by end-2022.
There were 14,758 unemployed people in the country in October 2022, down by 1,207 from the previous year.
In October 2022, annual inflation stood at 6.9%, unchanged from the previous month. The European Commission believes that inflation in 2022 will reach 8.4%, sharply up from 3.5% in 2021 and an annual average of just 1.6% in 2010-20, mainly driven by surging energy and commodity prices.