Leasing, a modern trend
The Garage Schmitz in Mersch has been a BMW dealership since 1968. Since its takeover by the Cloppenburg...
On the one hand, the population increased by 30% from 2005 to 2018 (from 461,000 to 602,000 residents according to STATEC). Immigration, i.e. the arrival of new residents from foreign countries, explains 80% of this increase. Our economic conditions promote job creation, especially in the tertiary sector and as such, attract newcomers. This growth does not exist on the same scale in neighbouring countries.
On the other hand, the availability of new dwellings does not match the population increase. On average, 2,700 dwellings have been built per year over the last few years. According to a 2011 study by STATEC , we would need 6,500 more new dwellings per year under the assumption that the population would grow by 1.1%. However, we are already experiencing annual growth of 2%.
Other factors also explain the price increase, such as low interest rates, which facilitates access to loans, but also higher energy efficiency requirements and the rising construction costs that are associated. Finally, the 2015 real estate VAT increase from 3% to 17% had a direct impact on housing prices.
We should also mention that despite our country’s small size, we are not lacking in land. The Observatoire de l’Habitat estimated that there were about 2,719 hectares of undeveloped land stock in 2013. 92% of this land is privately owned and owners clearly prefer to delay the development and sale of their land.
A very interesting thematic booklet was recently published by Fondation IDEA , discussing, among others, measures against the counter-productive holding of assets to make land available. Nevertheless, the measures proposed are highly unlikely to please land owners.
With market shares close to 50%, BCEE is in a good position to measure price differences throughout Luxembourg. As such, we have identified seven regions with different price points, and it comes as no surprise that Luxembourg City and the outskirts have the highest prices. We can also confirm the Observatoire de l’Habitat 's statement that the increase in price per square metre depends on the distance from downtown and the time spend commuting, whether by public transit or car. This can explain why for example prices in the Alzette Valley, which has an efficient rail network and access to the North motorway, are higher than in other regions that are located at the same distance but that do not have these quick connections to the city.
Our studies show that real estate prices per square metre depend on several factors.
On average over the last 12 months, our analyses have shown a price increase of 5% to 6% in 2017. The Observatoire de l’Habitat has not yet published their results at 31 December 2017, but we can expect similar findings.
A housing bubble happens when prices are higher than the equilibrium determined by market fundamentals. However, several recent studies (Banque Centrale du Luxembourg , International Monetary Fund , OECD ) have concluded that we are not experiencing this type of over-evaluation.
We are far from the Spanish situation where entire villages have been built without the corresponding demand to speculate on the future increase of prices.Dr Daniel Mack - Credit Process Management
Nevertheless, a recent report by the European Systemic Risk Board (ESRB)  analysed the evolution of real estate markets in different EU countries and noticed high prices and a considerable indebtedness trend in Grand Duchy households. Following this report, the 7218 law  was recently adopted to allow the national regulator, Comission de Surveillance du Secteur Financier (CSSF) to impose caps on the attribution of new loans. This refers to borrower-based measures, which impact among others the minimum investment of personal funds as well as maximum redemption: i.e. the ratio between expenses and monthly revenues.
It should be noted that this law does not provide a fixed limit, but simply provides the CSSF and the Banque Centrale du Luxembourg (BCL) with the tools they need to introduce restrictive limits if judged necessary from a macroprudential perspective.
Such measures already exist in several European countries such as Ireland, Finland and the Netherlands.
The regulator of Luxembourg is aware that these measures may have undesirable side effects on the national economy, and more specifically the access to loans for young families and first-time buyers. The application of these measures is not currently in effect as the banks of the Luxembourg financial market traditionally apply responsible lending policies and, as such, aim to avoid customer over-indebtedness.