Luxembourg's residential property market woes continue - characterized by plummeting demand and declining construction activity, aggravated by the country's struggling economy.

Table of Contents

• Housing Market Snapshot
• Demand Highlights
• Supply Highlights
• Rental Market
• Mortgage Market
• Socio-Economic Context

Housing Market Snapshot

During the year to Q1 2024, the average selling price for apartments fell by 8.72% to €7,802 (US$8,483) per square metre (sqm), according to the STATEC Luxembourg, the country's national statistics agency. It was the fifth consecutive quarter of year-on-year price falls.

When adjusted for inflation, the decline in prices was even bigger, at 11.59% y-o-y in Q1 2024.

Though on a quarterly basis, nationwide apartment prices were up slightly by 1.62% (1.27% inflation-adjusted) in Q1 2024.

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 in its 2023 report.

In a later report by the IMF published in March 2024, it urged the Luxembourg government to expedite supply-side measures to allow an orderly rebalancing of the housing market.

"Given the slump in the housing sector, to reduce potentially durable disruptions to downstream activities, the government has unveiled several measures, temporary and permanent, to stimulate housing demand. These measures could help restore confidence and alleviate pressure on the construction sector," said the IMF.

"However, given supply constraints, the boost to demand is likely to result in further deterioration of households' indebtedness and affordability. Over time, these measures may lead to moral hazard and promote risk-taking. On balance, staff reiterate the importance of supply-side measures to reduce supply rigidity. Staff propose to frontload public investment in social and affordable housing in cost-efficient ways, with greater involvement of the private sector," added the IMF.

Luxembourg's house price annual change

By property type:

• Existing apartments' average acquisition price fell by 8.63% (-11.5% inflation-adjusted) to €7,670 (US$8,339) per sqm in Q1 2024 from a year earlier, following y-o-y declines of 13.77% in Q4 2023, 9.67% in Q3, 3.72% in Q2, and 2.35% in Q1. The decline was higher at 11.5% in real terms. Yet quarter-on-quarter, prices were up by 1.69% (1.34% inflation-adjusted).
• New apartments' average price fell slightly by 1.32% (-4.42% inflation-adjusted) to €9,340 (US$10,155) per sqm in Q1 2024 from a year earlier, after a y-o-y decline of 5.13% in Q4 2023 and increases of 8.41% in Q3, 15.12% in Q2, and 5.59% in Q1. On a quarterly basis, prices increased by 1.21% (0.86% inflation-adjusted).

Demand for residential properties is plummeting, amidst high mortgage interest rates. During 2023, the total number of sales transactions for apartments in Luxembourg fell by a whopping 44.6% to 3,252 units from a year earlier. It was the lowest number of sales transactions recorded in recent years. Likewise, the transaction value declined by 47.8% y-o-y to €2.08 billion (US$2.26 billion) last year.

In Q1 2024, the number of sales transactions increased by 9.3% y-o-y but still one of the lowest ever recorded. The total value fell slightly by 0.4% over the same period.

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

With weak demand, residential construction activity is falling. During 2023, the total number of dwellings with approved building permits fell by 5.3% y-o-y to 4,458 units, following a decline of 22.9% in the prior year. Then in Q1 2024, dwelling permits plunged by another 17.8% to 1,257 units as compared to a year earlier, based on figures from STATEC Luxembourg.

The wider economy is also struggling. In 2023, Luxembourg's economy contracted by 1.1%, in contrast to annual growth of 1.4% in 2022 and 7.2% in 2021, primarily due to a decline in exports and investment. Then in Q1 2024, the country registered another 0.4% economic contraction as compared to the same period last year, following y-o-y declines of 0.6% in Q4 2023, 2% in Q3, 0.4% in Q2, and 1.4% in Q1.

The European Commission expects the economy to register an overall economic growth of 1.4% this year while IMF projects a slightly lower growth of 1.3%.

Luxembourg is considered the richest country in the world, with a GDP per capita of US$129,810 in 2023, based on IMF figures.

Demand Highlights

Property transactions plummeting

During 2023, the total number of sales transactions for apartments in Luxembourg fell by a whopping 44.6% to 3,252 units from a year earlier, following y-o-y declines of 14.1% in 2022, 0.1% in 2021, 6.2% in 2020 and 3.3% in 2019, according to STATEC Luxembourg. It was the lowest number of sales transactions recorded in recent years.

Likewise, the transaction value declined by 47.8% y-o-y to €2.08 billion (US$2.26 billion) last year, after falling by 10.7% in the prior year.

During 2023:

• Existing apartments: the number of transactions dropped 34.4% y-o-y to 2,681 units and transaction value fell by 38% to €1.67 billion (US$1.81 billion).
• New apartments: the number of transactions fell by a massive 68% y-o-y to a record low 571 units and the value of sales declined by 68.2% to €410 million (US$445.8 billion).

Demand remains weak this year. In Q1 2024, there were 901 sales transactions, up by 9.3% from a year earlier but still very low by historical standards. Transaction value fell slightly by 0.4% y-o-y to €548 million (US$595.8 million) over the same period.

Homeownership rate falling

Most people in Luxembourg live in owner-occupied properties. However, homeownership in the country is noticeably declining in recent years, with more people choosing to rent.

During 2023, the nationwide homeownership rate stood at 67.6%, sharply down from 72.4% in the prior year, according to Eurostat figures.

With high property prices, an increasing number of people are choosing to rent. 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.

Supply Highlights

Construction activity continues to fall

During 2023, the total number of dwellings with approved building permits fell by another 5.3% y-o-y to 4,458 units, following a decline of 22.9% in the prior year.

The weakness of the residential construction sector continues this year. In Q1 2024, the number of dwellings in residential buildings with approved permits plunged by 17.8% to 1,257 units as compared to the same period last year, based on figures from STATEC Luxembourg.

By region:

• Luxembourg City defied the national trend, with the number of dwelling permits in the city surging by 28.5% y-o-y to 415 units in Q1 2024.
• In the Cantons of the East (Echternach, Grevenmacher, and Remich), dwelling permits plunged by 27.1% to just 105 units in Q1 2024 from a year earlier.
• In the Cantons of the Centre (Luxembourg-countryside, and Mersch), there were 166 dwelling permits issued in Q1 2024, a sharp decline of 43.7% from a year ago.
• In the Cantons of the South (Esch-sur-Alzette and Capellen), dwelling permits rose by 19.3% y-o-y to 421 units in Q1 2024.
• In the Cantons of the North and the West (Clervaux, Diekirch, Redange, Vianden and Wiltz), dwelling permits plummeted by 58.6% y-o-y to 147 units over the same period.

Housing Pact 2.0 launched to address affordable housing problems

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 in 2021. 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:

Currently, 97 municipalities have signed up for the Housing Pact 2.0 and many of them have already drawn up their own implementation of the local action programme for housing (Programme d'action locale logement - PAL), said the Ministry of Housing during the 3rd Luxembourg Housing Conference held in May 2023.

"I am particularly delighted with this strengthened collaboration between the Ministry of Housing and the other players in affordable housing," said Minister of Housing Henri Kox. "It is only by working effectively together that the deployment of the important affordable housing reform can move forward quickly. This reform - the cornerstone of the national affordable housing strategy - is particularly important for achieving the right to housing."

Rental Market

Rental yields still low, rents stabilizing

Rental yields in Luxembourg are low. Based on a recent Global Property Guide research, the gross rental yields on apartments - the return earned on the purchase price of a rental property, before taxation, vacancy costs, and other costs - averaged 2.67% in Q2 2024. It is slightly up from 2.59% in Q2 2023 but still far lower than the average rental yield of 5% six years ago.

Residential rents are more or less steady. In Q1 2024, the average apartment rent in Luxembourg fell slightly by 1.1% from a year earlier, in contrast to y-o-y increases of 0.8% in Q4 2023, 4% in Q3, 6.7% in Q2, and 11.6% in Q1, according to the Ministere du Logement.

Rents for houses, on the other hand, were up by 1.5% y-o-y in Q1 2024. Yet, it was the weakest growth registered since Q2 2022.

Nationwide, the average advertised rent for apartments was €1,748 (US$1,901) per month or around €33.53 (US$36.46) per square meter (sqm) in Q1 2024, based on figures from Ministere du Logement. For houses, the average rent was €3,366 (US$3,660) per month or €17.67 (US$19.21) per sqm over the same period.

In Luxembourg City, the country's capital, advertised rents are higher. The city's average advertised rent for apartments was at €1,871 (US$2,034) per month or €39.34 (US$42.77) per sqm in Q1 2024, while the average rent for houses was at €4,502 (US$4,895) per month or €22.19 (US$24.13) per sqm.

Luxembourg City is the centre of rental market activity in the country, accounting for more than 52% of the total 10,648 apartment rental ads in Q1 2024, and 23% of the 1,110 housing rental offers over the same period, according to Ministere du Logement.

Mortgage Market

High mortgage interest rates

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

Luxembourg's mortgage loan interest rates:

In May 2024:

• Floating rate and/or initial rate fixation (IRF) of up to 1 year: 4.81%, up from 4.44% in the previous year and far higher than the 1.36% 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: 3.86%, slightly down from 4.08% in May 2023 but still a dramatic increase from 1.83% in May 2022.
• IRF greater than 5 years and less than or equal to 10 years: 3.77%, slightly down from 4.18% in the same period last year but still sharply up from 1.8% two years ago.
• IRF for longer than 10 years: 3.65%, down from 4.04% in the previous year but still up from 2.11% two years earlier.

Likewise, the average interest rate for outstanding housing loans also increased to 2.89% in May 2024, from 2.68% in the same period last year and 1.58% two years earlier.

Interest rates in Luxembourg are expected to gradually stabilize in the coming months after the ECB decided to lower its key interest rate by 25 basis points to 4.25% in June 2024, amidst easing inflationary pressures.

Most loans in Luxembourg have variable rates, so borrowers are very exposed to interest rate changes. The average loan-to-value ratio stands at more than 85%, with around 60% of all mortgages having loan maturities of 20 years and over.

New housing loans falling sharply

With rapidly rising interest rates, it is not surprising that new housing loans are declining. In 2023, the value of new residential real estate loans plunged by a huge 40.5% y-o-y to €5.56 billion (US$6.04 billion), based on figures from the Banque Centrale du Luxembourg. It was the lowest in the past decade. Likewise, the total number of such loans dropped sharply by 30.5% to 12,742 last year.

Loans by purpose, in 2023:

• Single-family homes: €2.43 billion (US$2.64 billion), sharply down by 43.2% from the prior year
• Housing in apartment buildings: €1.57 billion (US$1.71 billion), down by a huge 46% from a year earlier
• Other residential or semi-residential buildings: €448 million (US$487 million), down by 38.5% from a year earlier
• Improvements of existing buildings: €219 million (US$238 million), down by 32.2% from the previous year

New housing loans drawn and approved have been continuously falling this year. In Q1 2024, new residential real estate loans dropped 19.7% y-o-y to €1.27 billion (US$1.38 billion). Likewise, the number of such loans also declined by 22.3% to 2,976 over the same period.

The size mortgage market is gradually shrinking

As a result of declining new housing loans approved, the total amount of housing loans outstanding in Luxembourg fell by 0.9% y-o-y to €41.07 billion (US$44.66 billion) in June 2024, following an annual decline of 1.2% in 2023 and increases of 5.1% in 2022, 9.1% in 2021, 9.9% in 2020 and 8.4% in 2019, according to figures released by the Banque Centrale du Luxembourg.

By initial duration, in June 2024:

• The initial duration of fewer than 5 years: €1.08 billion (US$1.17 billion), sharply down by 35.7% from a year earlier
• 5 to 10 years: €2.54 billion (US$2.76 billion), slightly up by 0.8% from a year earlier
• 10 to 15 years: €3.43 billion (US$3.73 billion), down by 6.4% from a year ago
• 15 to 20 years: €5.37 billion (US$5.84 billion), lower by about 3% as compared to the same period last year
• 20 to 25 years: €8.28 billion (US$9 billion), down slightly by 0.6% from a year ago
• 25 to 30 years: €14.54 billion (US$15.81 billion), up by 1.6% from a year earlier
• 30 years and more: €5.84 billion (US$6.35 billion), up by 7.5% compared to the same period last year

Luxembourg's mortgage debt as a percentage of GDP stood at about 51.9% in 2023, a decline from 53.7% of GDP in 2022, 54.8% in 2021, and 56.3% in 2020, based on figures from the Global Property Guide. But it was still sharply up from just 22.5% of GDP in 1999.

Socio-Economic Contex

The economy remains weak, and unemployment increasing

During 2023, Luxembourg's economy contracted by 1.1% from a year earlier, in contrast to annual growth of 1.4% in 2022 and 7.2% in 2021, primarily due to a decline in exports and investment. Then in Q1 2024, the country registered another 0.4% economic contraction as compared to the same period last year, following y-o-y declines of 0.6% in Q4 2023, 2% in Q3, 0.4% in Q2, and 1.4% in Q1.

"The weakening of the activity was mainly observed in the financial and construction sectors with an important drop in gross value added, explained notably by high interest rates, high level of real estate prices and supply constraints," said the European Commission.

Despite the early contraction, the European Commission expects the economy to register an overall economic growth of 1.4% this year while the IMF projects a slightly lower growth of 1.3%. STATEC Luxembourg is even more optimistic, expecting a real GDP growth of 1.5% for the whole year of 2024, before accelerating to 3% next year.

"Growth is expected to rebound moderately in 2024 along with receding inflation pressure. Fiscal support to households, unwinding of high savings, and continued disinflation will boost consumption and residential investment," said the IMF. "With expected monetary policy easing and improving confidence, growth is projected to strengthen further in 2025, converging to its potential in the medium term."

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 country suffered an economic contraction of 0.8% in 2020 amidst the Covid-19 pandemic. Then in 2021, the economy bounced back, posting a strong real GDP growth of 7.2%, as pandemic-related restrictions were gradually eased.

In June 2024, annual inflation eased to 2.2%, down from 2.6% in the previous month and 3.2% a year earlier. Inflation had been averaging just 1% from 2013 to 2020, before rising to 3.5% in 2021 and further to a record 8.2% in 2022. Inflation slowed to 2.9% last year.

"Headline inflation decreased to 2.9% in 2023, as a result of a drop in energy and goods prices. It is set to drop to 2.3% in 2024 and 2.0% in 2025 due to the deceleration of prices of industrial goods, food and services," predicted the European Commission.

The country posted a budget deficit equivalent to about 1.3% of GDP in 2023, worse than a shortfall of 0.3% of GDP in 2022 and a surplus of 0.6% of GDP in 2021, amidst increased public spending. The deficit is projected to widen further to about 1.7% of GDP this year and 1.9% in 2025.

As a result, public debt will also increase to 27.1% of GDP this year and to 28.5% in 2025, up from 25.7% in the previous year and 24.7% in 2022.

The labour market continues to weaken. In June 2024, the overall unemployment rate was 5.7%, unchanged from the previous month but up from 5.2% in the same period last year, according to figures from STATEC Luxembourg. Overall unemployment is projected to increase to 5.8% this year and to 5.9% in 2025.

There were 17,083 unemployed people in the country in June 2024, up by 1,750 jobseekers of 11.4% from the same period last year.

Sources:

1. Economy and prices (STATEC Luxembourg): https://statistiques.public.lu/
2. Etablissements de credit (Banque Centrale du Luxembourg): https://www.bcl.lu/
3. Marchés de capitaux et taux d'intérêt (Banque Centrale du Luxembourg): https://www.bcl.lu/
4. Loyers annoncés des logements (Ministere du Logement): https://data.public.lu/
5. Gross rental yields in Luxembourg (2024, Q2) (Global Property Guide): https://www.globalpropertyguide.com/
6. Luxembourg Home Ownership Rate (Trading Economics): https://tradingeconomics.com/
7. Article 29bis - Pacte logement 2.0 (The Luxembourg Government): https://gouvernement.lu/
8. 3rd Luxembourg Housing Conference Discusses Affordable Housing Pact 2.0 (Chronicles.lu): https://chronicle.lu/
9. Economic forecast for Luxembourg (European Commission): https://economy-finance.ec.europa.eu/
10. Luxembourg: Staff Concluding Statement of the 2024 Article IV Mission (International Monetary Fund): https://www.imf.org/
11. IMF Executive Board Concludes 2024 Article IV Consultation with Luxembourg (International Monetary Fund): https://www.imf.org/
12. Macroeconomic forecast (STATEC Luxembourg): https://lustat.statec.lu/
13. Real GDP for the 1st quarter of 2024: +0.5% compared with the previous quarter (STATEC Luxembourg): https://statistiques.public.lu/
14. Annual inflation rate down from 2.6% to 2.2% (STATEC Luxembourg): https://statistiques.public.lu/
15. 17,083 jobseekers, a stable unemployment rate and a fall in the number of new registrations (STATEC Luxembourg): https://statistiques.public.lu/