21st October 2019

The Luxembourg Real Estate Market: current market prices (part II)

The high real estate prices are a direct consequence of the imbalance between supply and demand for housing in our country. But how did this imbalance occur? Michel Zimer, head of Credit Process Management, analyses the factors that explain the increase in real estate prices in Luxembourg.

The media recently reported the biggest quarterly rise in property prices for 2017 and 2018. Why is this?

High property prices are a direct consequence of the clear imbalance between supply and demand for housing in our country. On the one hand, the population saw a 20% growth from 2010 to 2018 (from 512.029 to 613.894 residents[1]).



Firstly, the housing supply is struggling to keep up with the increase in the number of households.

Approximately 80% of this increase is due to the arrival of new residents from abroad, with the remainder coming from the naturally higher number of births than deaths. Economic growth in recent years has favoured job creation, especially in the tertiary sector, and has attracted a large number of newcomers.

The relocation of activities to Luxembourg due to Brexit has, and will, continue to have an impact on demand for real estate. In March 2019, Luxembourg for Finance reported that more than 50 institutions had publicly announced their relocation to Luxembourg. That level of 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. In the West, there are an average of between 2 and 2,5 people per household. According to the latest projection from STATEC, this means that between 5.600 and 7.500 additional housing units a year need to be created depending on the economic growth scenarios. Only 2.891 housing units have been completed on average per year since 2010, compared with an annual surplus of 5.390 households.

The very low rate level mitigates the effects of rising prices.
Michel Zimer

To take an illustrative example, a redemption of EUR 2.000 at a rate of 1,50% allows a loan of more than EUR 550.000 over 30 years, whereas if the rate were 5,50% the borrowing capacity would be limited to EUR 350.000. The imbalance in the market between supply and demand combined with low rates is certainly helping to push up prices.

Furthermore, although the rental yield may have fallen in recent years, it remains attractive in this low interest rate environment.

The increase in construction costs (inflation, energy performance requirements) and VAT are also, to a lesser extent, factors explaining the increase in prices.

However, we consider that these reasons are marginal compared to the aforementioned factors. The 2015 increase in VAT for rental properties from 3% to 17% also had an impact on housing prices.

Do significant price variations exist across the country?

With a market share of close to 50%, Spuerkeess 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 observation made by the Observatoire de l’Habitat that the increase in price per square metre depends on the distance from downtown and the time spent commuting, whether by public transport or car. This explains why prices in the Alzette Valley, for example, with its efficient rail network and access to the North motorway, are higher than in other regions that are located at the same distance but do not have these quick connections to the city.

Our studies show that real estate prices per square metre depend on several factors.
Michel Zimer
  • The type of real estate: it is useful to distinguish between apartments and houses, but also between existing buildings and new constructions, and more precisely according to energy efficient ratings. We find that the price for a new property is higher compared with an existing property, but this gap is narrowing in areas where tension between supply and demand is highest, for example in Luxembourg City.
  • Location: the price of a house in Luxembourg City is double the price of a house in the north of the country. This comparison does not take into account the average size of the land or living area, which would further widen the gap between the two. As for new apartments, the average price per square metre in the city centre was close to EUR 9.000 in 2018, compared to about EUR 4.300 in the north, EUR 6.900 in the outskirts of the city and EUR 6.000 in the rest of the country.
  • Habitable space: the price per square metre decreases with the increase in living space. A studio therefore has a higher price per square metre than a three-bedroom apartment in the same area.

On average, our analyses show a price increase of around 9% in 2018. We are also seeing a continuation of the price increases in 2019. The Observatoire de l'Habitat and STATEC reach similar conclusions.