Luxembourg’s housing market is cooling rapidly

Luxembourg’s residential property prices have started to fall, amidst plunging demand caused by rising interest rates.

During the year to Q1 2023, the average selling price for apartments dropped 1.93% to €8,548 (US$9,393) per square metre (sqm), according to the STATEC Luxembourg, the country’s national statistics agency. It was a dramatic turnaround from a y-o-y increase of 8.07% in the same period last year and the first decline seen since Q3 2014.

When adjusted for inflation, the decline in prices was even bigger, at 5.91% y-o-y in Q1 2023.

Luxembourg’s house price annual change

On a quarterly basis, nationwide apartment prices were down by 4.98% (-5.29% inflation-adjusted) in Q1 2023.

Despite the decline, property prices in Luxembourg remain high, according to the International Monetary Fund (IMF). “Housing price growth, both real and nominal, has moderated but remained high even as demand has declined,” said the IMF.

By property type:

• Existing apartments’ average acquisition price fell by 2.35% (-6.31% inflation-adjusted) to €8,394 (US$9,224) per sqm in Q1 2023 from a year earlier, following y-o-y increases of 3.39% in Q4 2022, 7.07% in Q3, 8.17% in Q2 and 12.8% in Q1. Quarter-on-quarter, prices were down by 4.03% and by 4.34% when adjusted for inflation.
• New apartments’ average price rose by 5.59% (1.31% inflation-adjusted) y-o-y to €9,465 (US$10,401) per sqm over the same period, after increasing by 1.86% in Q4 2022, 18.25% in Q3, 9.57% in Q2 and declining slightly by 1.04% in Q1. Yet on a quarterly basis, prices declined 2.7% (3.02% inflation-adjusted).

Demand for residential properties is now plunging, amidst rapidly rising mortgage interest rates. During 2022, the total number and value of apartment transactions fell by 14.1% and 10.7%, respectively, based on figures from STATEC Luxembourg. In Q1 2023, the decline was more pronounced, with the number of transactions plummeting by 52.7% and sales value dropping by 52.5%.

Foreign homebuyers are also adopting a wait-and-see approach, amidst heightened global economic and geopolitical uncertainty. Foreigners can freely buy property in Luxembourg.

Despite weak demand, the total number of dwellings in residential buildings with approved permits rose by 39.3% y-o-y to 1,470 units in Q1 2023, following a 22.9% decline in the full year of 2022.

Luxembourg’s housing market woes will persist during the remainder of the year, with an expected bigger house price falls, as demand continues to plummet.

“We continue to see stagnation in the real estate market as a result of cancellations or postponements of transactions. This is primarily due to sellers expecting to maintain or receive higher values for their assets at a time when buyers may no longer be willing to pay the same multiples compared to a year ago. This discrepancy will last until buyers feel a sense of stability within the economy. Real estate transactions, therefore, will likely drop or stagnate,” said KPMG.

The overall economy remains weak. In the first quarter of 2023, Luxembourg’s economy contracted by 0.4% from a year earlier, following a y-o-y decline of 2.2% in Q4 2022 and annual growth of 3.8% in Q3, 2.2% in Q2 and 2.5% in Q1, according to STATEC Luxembourg. The government expects the economy to grow slightly by 1.5% during the full year of 2023, at par with the previous year’s expansion.

Property transactions falling

During 2022, the total number of sales transactions for apartments in Luxembourg fell by 14.1% to 5,872 units from a year earlier, following zero growth in 2021 and y-o-y declines of 6.3% in 2020 and 3.3% in 2019, according to STATEC Luxembourg.

Likewise, the transaction value declined 10.7% y-o-y to €3.98 billion (US$4.37 billion) last year, in contrast to an increase of 9.6% in 2021.

During 2022:

• Existing apartments: the number of transactions dropped 7.4% y-o-y to 4,088 units and transaction value fell by 3.5% to €2.69 billion (US$2.96 billion)
• New apartments: the number of transactions fell by 26.4% to 1,784 units and the value of sales declined 22.6% to €1.29 billion (US$1.42 billion)

Demand continues to fall this year. In Q1 2023, the total number of transactions plummeted by 52.7% y-o-y to 822 units and transaction values were down 52.5% to €550 million (US$604.4 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.

In May 2023:

• Floating rate and/or initial rate fixation (IRF) of up to 1 year: 4.38%, sharply up from just 1.36% a year earlier and 1.33% two years ago, according to figures released by the Banque Central du Luxembourg (BCL)
• IRF greater than 1 year and less than or equal to 5 years: 4.05%, a dramatic increase from 1.83% in May 2022 and 1.07% in May 2021
• IRF greater than 5 years and less than or equal to 10 years: 4.09%, sharply up from 1.8% in the same period last year and 1.12% two years ago
• IRF for longer than 10 years: 3.8%, up from 2.11% a year earlier and 1.39% two years ago

Likewise, the average interest rate for outstanding housing loans also increased to 2.68% in May 2023, from 1.58% in the same period last year and 1.62% two years earlier.

Most loans in Luxembourg are variable rates, 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.

The mortgage market is gradually shrinking

With rapidly rising interest rates, it is not surprising that new housing loans are declining. In May 2023, the value of new housing contracts with floating rate and/or initial rate fixation (IRF) of up to 1 year fell by nearly 30% y-o-y to €216 million (US$237.4 million). For new housing loans with IRF of 1 to 5 years, and 5 to 10 years, the value of contracts declined by 5% to €19 million (US$20.9 million) and by 63.4% to €30 million (US$33 million), respectively. For loans with IRF of more than 10 years, total contract value plunged by 36.6% y-o-y to €227 million (US$249.4 million) in May 2023.

As a result, the total amount of housing loans outstanding rose by a minuscule 0.9% y-o-y to €41.46 billion (US$45.56 billion) in June 2023, following annual increases of 5.1% in 2022, 9.1% in 2021, 9.9% in 2020 and 8.4% in 2019, according to the Banque Centrale du Luxembourg.

By initial duration, in June 2023:

• The initial duration of fewer than 5 years: €1.68 billion (US$1,84 billion), up by 8.2% from a year earlier
• 5 to 10 years: €2.52 billion (US$2.77 billion), down by 4.5% from a year earlier
• 10 to 15 years: €3.66 billion (US$4.02 billion), down by 6.4% from a year ago
• 15 to 20 years: €5.54 billion (US$6.09 billion), lower by about 1.5% as compared to the same period last year
• 20 to 25 years: €8.33 billion (US$9.15 billion), down slightly by 0.2% from a year ago
• 25 to 30 years: €14.31 billion (US$15.72 billion), up by a modest 2.3% from a year earlier
• 30 years and more: €5.43 billion (US$5.97 billion), up by 7.4% compared to the same period last year

Luxembourg’s mortgage debt as a percentage of GDP stood at about 53.3% in 2022, a decline from 54.8% in the previous year but still sharply up from 22.5% of GDP in 1999, based on figures from the Global Property Guide.

Low rental yields, rising rents

Rental yields in Luxembourg are low. Based on the Global Property Guide research conducted in July 2023, 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 2.04% to 3.63%. It is down from an average rental yield of 5% five years ago.

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

Residential rents are rising strongly. In Q1 2023, the average apartment rent in Luxembourg increased by 11.6% from a year earlier, a sharp improvement from a y-o-y increase of 6.9% in Q4 2022, zero growth in Q3, and declines of 1.6% in Q2 and 2.6% in Q1, according to the Ministere du Logement.

Rents for houses were also up by 11.1% y-o-y in Q1 2023, the biggest increase recorded since Q4 2018.

Nationwide, the average advertised rent for apartments was €1,608 (US$1,767) per month or around €33.58 (US$36.90) per square meter (sqm) in Q1 2023. For houses, the average rent was €3,376 (US$3,710) per month or €17.16 (US$18.86) per sqm.

In Luxembourg City, the country’s capital, advertised rents are higher. The city’s average advertised rent for apartments was at €1,724 (US$1,894) per month or €38.56 (US$42.37) per sqm in Q1 2023, while the average rent for houses was at €4,306 (US$4,732) per month or €21.42 (US$23.54) per sqm.

Luxembourg City is the centre of rental market activity in the country, accounting for more than 55% of the total 13,225 apartment rental ads in Q1 2023, and nearly 24% of the 1,155 housing rental offers 0ver the same period, according to Ministere du Logement.

Most people in the country live in owner-occupied properties, with a homeownership rate of 72.4% in 2022, up from 71.1% in 2021 and 68.4% in 2020, according to Eurostat figures. 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 increasing again

During 2022, the total number of dwellings with approved building permits fell by 22.9% y-o-y to 4,709 units, in contrast to a 19.4% increase in 2021.

Though, construction activity is now improving again. In Q1 2023, the total number of dwellings in residential buildings with approved permits rose by 39.3% y-o-y to 1,470 units, according to STATEC Luxembourg.

By region:

• In Luxembourg City, the number of dwelling permits surged by nearly 120% y-o-y to 323 units in Q1 2023.
• In the Cantons of the East (Echternach, Grevenmacher, and Remich), dwelling permits increased 16.1% to 144 units in Q1 2023 from a year earlier.
• In the Cantons of the Centre (Luxembourg-countryside, and Mersch), there were 295 dwelling permits in Q1 2023, up by 15.2% from a year ago.
• In the Cantons of the South (Esch-sur-Alzette and Capellen), dwelling permits skyrocketed by 165.4% y-o-y to 353 units in Q1 2023.
• In the Cantons of the North and the West (Clervaux, Diekirch, Redange, Vianden and Wiltz), dwelling permits dropped 10.1% y-o-y to 355 units over the same period.