12th December 2019

The Luxembourg Real Estate Market: rental investment

Spuerkeess is market leader for residential real estate loans in Luxembourg. We spoke with Michel Zimer, Vice President of Credit Process Management, and asked him to give us an overview of the latest developments in the real estate market.

Does the housing price increase suggest the potential for a housing bubble in Luxembourg?

A housing bubble happens when prices are higher than the equilibrium determined by market fundamentals. However, several studies (Banque Centrale du Luxembourg [1], International Monetary Fund [2] and OECD [3]) 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 in order to speculate on the future increase of prices.
Michel Zimer

Nevertheless, a recent report by the European Systemic Risk Board (ESRB) [4] 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, draft law no. 7218 [5] was recently adopted to allow the national regulator, the Commission de Surveillance du Secteur Financier (CSSF), to impose caps on the attribution of new loans.

This refers to borrower-based measures which, among others, impact the minimum investment of personal funds as well as maximum redemption: i.e. the ratio between expenses and monthly income.

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 necessary from a macroprudential perspective.

Such measures already exist in several European countries such as Ireland, Finland and the Netherlands.

The Luxembourg regulator is aware that these measures could have undesirable side effects on the national economy, and more specifically access to loans for young families and first-time buyers.

Such measures are currently not imposed, as banks traditionally apply responsible lending policies designed to avoid customer over-indebtedness.

Is it possible to limit this steady increase in prices?

Three main factors could limit this increase. A sudden rise in interest rates, a substantial fall in positive net migration or a massive increase in housing supply would have an impact on prices. We do not anticipate such changes at present, however. Of the three factors mentioned above, we believe that only an increase in supply could have a beneficial effect for the resident population.

Despite our country’s small size, we are not lacking in land.
Michel Zimer

The Observatoire de l’Habitat estimated that there was approximately 2.719 hectares of undeveloped land stock in 2013 [6]. According to the General Development Plan (PAG), more than three-quarters (75,6%) of total available space for housing in municipalities belongs to individuals (natural persons) and 16,4% to legal entities, with public bodies only owning 8% of the surface area.

The increase in housing supply will therefore necessarily rely on private players, with the involvement of public authorities.

Is it still reasonable to buy at such high prices?

It all depends on the individual's personal situation. A person or household wanting to buy their own home must make a number of choices.

Prices vary depending on the location, the availability of public transport, municipal infrastructure and, of course, the condition of the property.

A compromise often has to be made between property size and proximity to the workplace.

  • First-time buyers need to compare the cost of financing a purchase compared with their rental outgoings, particularly based on the proposed loan term and an achievable level of deposit.
  • Investors must assess the return and risks of a real-estate acquisition compared with alternative investments.

Spuerkeess housing advisors can assist and guide future buyers and investors with their analysis and decisions.