Luxembourg

Luxembourg Residential Real Estate Market Analysis 2022

Lalaine C. Delmendo

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.

Source: Statec Luxembourg

“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.

Luxembourg average prices

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.

Property transactions showed mixed results

In the first half of 2022, the total number of sales transactions for apartments in Luxembourg fell by 4.5% to 3,272 units as compared to the same period last year, following zero growth in 2021 and y-o-y declines of 6.3% in 2020 and 3.3% in 2019, according to STATEC Luxembourg.

Luxembourg interest apartment sales

In contrast, the transaction value increased 2.8% y-o-y to €2.22 billion (US$2.3 billion) in H1 2022.

Over the same period:

  • Existing apartments: the number of transactions dropped 2.1% y-o-y to 2,175 units while transaction value rose by 6.6% to €1.44 billion (US$1.49 billion)
  • New apartments: the number of transactions fell by 8.9% to 1,097 units and the value of sales declined 3.4% to €780 million (US$808 million)

Mortgage interest rates rising sharply

Following the ECB’s move to raise its key interest rate to rein in inflationary pressures in the European Union, mortgage interest rates in Luxembourg have been rising rapidly in recent months.

Luxembourg interest rates housing loans

In September 2022:

  • Floating rate and/or initial rate fixation (IRF) of up to 1 year: 1.41%, up from 1.29% a year earlier, according to the Banque Central du Luxembourg (BCL)
  • IRF greater than 1 year and less than or equal to 5 years: 2.63%, sharply up from 1.06% in the previous year
  • IRF greater than 5 years and less than or equal to 10 years: 2.81%, sharply up from 1.19% in September 2021
  • IRF for longer than 10 years: 2.86%, up from 1.37% a year earlier

Likewise, the average interest rate for outstanding housing loans also increased slightly to 1.62% in September 2022, from 1.59% in the same period last year.

Most loans in Luxembourg are variable rate, so borrowers are very exposed to interest rate changes. The average loan-to-value ratio stands at more than 85%, with around 50% of all mortgages having loan maturities of 20 years and over.

Mortgage market still growing

In the third quarter of 2022, the total amount of housing loans outstanding rose by 7.3% y-o-y to €41.63 billion (US$43.15 billion), following annual increases of 9.1% in 2021, 9.9% in 2020, and 8.4% in 2019, according to the Banque Centrale du Luxembourg.

Luxembourg housing loans

By initial duration, over the same period:

  • Initial duration of less than 5 years: €1.69 billion (US$1,749), up 25.9% from a year earlier
  • 5 to 10 years: €2.65 billion (US$2,744), up by 5.6% from a year earlier
  • 10 to 15 years: €3.92 billion (US$4,060), up slightly by 0.3% from a year ago
  • 15 to 20 years: €5.71 billion (US$5,922), up 7% from a year ago
  • 20 to 25 years: €8.4 billion (US$8,708), up 4.7% from a year ago
  • 25 to 30 years: €14.25 billion (US$14,774), up 10.4% from a year earlier
  • 30 years and more: €5.16 billion (US$5,344), up by 8.2% compared to the same period last year

Luxembourg’s mortgage debt as percentage of GDP has sharply increased from 22.5% of GDP in 1999 to more than 54% of GDP in 2021, based on figures from the Global Property Guide.

Low rental yields, steady rents

Rental yields in Luxembourg are low. Based on the Global Property Guide research conducted in November 2022, 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 2.31% to 3.45%. It is down from an average rental yield of 5% five years ago.

Luxembourg rent index

Round trip transaction costs are high in Luxembourg, by European standards.

The average apartment rent in Luxembourg rose by 1.2% during the year to Q2 2022, according to the Ministere du Logement, while house rents fell by 1.6%.

During the year to Q2 2022, the average advertised rent for apartments was €1,479 (US$1,531) per month or around €32.27 (US$33.41) per sq. m. For houses, the average rent was at €3,249 (US$3,364) per month or €16.72 (US$17.31) per sq. m.

Advertised rents in Luxembourg City, the country’s capital, are higher. The city’s average advertised rent for apartments was at €1,539 (US$1,593) per month or €36.80 (US$38.10) per sq. m. in Q2 2022, while the average rent for houses was at €4,420 (US$ 4,576) per month or €20.06 (US$ 20.77) per sq. m.

Luxembourg City is the centre of rental market activity in the country, accounting for more than 59% of all apartment rental ads, and nearly 26% of housing rental offers during the second quarter of 2022, according to Ministere du Logement.

Most people live owner-occupied properties, with an owner-occupancy rate of 68.4% in 2021, according to the European Mortgage Federation (EMF). Tenants’ rights are well protected. Most property is rented unfurnished, but for furnished properties, the rent cannot be more than double the previous rate. Rents can only be increased every three years.

Construction activity continues to fall

In the first half of 2022, the total number of dwellings with approved building permits fell by 36.5% to 2,021 units as compared to the same period last year, according to STATEC Luxembourg.

By region:

  • In Luxembourg City, there were 325 dwelling permits in H1 2022, down by a huge 59.3% from a year earlier.
  • In the Cantons of the Centre and the South (Luxembourg-countryside, Mersch, Esch-sur-Alzette and Capellen), dwelling permits fell by 33.6% y-o-y to 1,109 units in H1 2022.
  • In the Cantons of the North and the West (Clervaux, Diekirch, Redange, Vianden and Wiltz), dwelling permits dropped 24.3% y-o-y to 349 units.
  • In the Cantons of the East (Echternach, Grevenmacher, and Remich), dwelling permits fell by 5.2% to 238 units in H1 2022 from a year earlier.

Housing Pact 2.0 launched

In an effort to increase the housing stock in the country and make houses more affordable, the Ministry of Housing introduced the Housing Pact 2.0 last year. According to the Luxembourg Government’s official website, the main goal of the new measure is to support municipalities in the development of affordable housing for the people.

To achieve this goal, Housing Pact 2.0 has three objectives:

  • Increasing the supply of affordable and sustainable housing;
  • Mobilizing existing land and residential potential; and,
  • Improving residential quality.

“Housing is the biggest challenge in Luxembourg for more and more people. However, with the impact of the health crisis and its consequences on public finances, the risk that municipalities and the state would give up on acquiring a significant number of affordable housing units was foreseeable. This would have compromised the purpose of our reform. That’s why we have come up with an alternative,” said Minister of the Interior Taina Bofferding.

Housing Pact 2.0 introduced a new Article 29bis, in order to strengthen the provision of affordable housing.

“Article 29bis ensures the creation of a higher number of affordable dwellings in each special development plan “new district” (PAP NQ) and thus ensures that a good social mix is maintained in new residential areas,” said the government.

For each new PAP NQ affected by Article 29bis, a certain percentage of the total area meant for housing is reserved for affordable housing, as shown in the table below:

Scope of the PAP NQ Share of gross built area to be reserved for affordable housing
For land classified as a building zone before February 18, 2022
10-25 dwellings At least 10%
>25 dwellings At least 15%
For land classified as a building zone after February 18, 2022
5-9 dwellings At least 10%
10-25 dwellings At least 15%
>25 dwellings At least 20%
Source: Luxembourg Government

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.

Luxembourg gdp inflation

“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.


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