Data show that Luxembourg’s residential real estate market has had a good run over the past three years, but the latest numbers show that things may be weakening in the tiny European nation. The Ministere de Logement reports that house prices fell 4.1% during 2012 after adjustment for inflation and experts expect things will get worse this year. Luxembourg’s mortgage market is large and interest rates are at all-time lows, but the country remains in a recession and lending is still somewhat restricted. For more on this continue reading the following article from Global Property Guide.
After almost three years of house price rises, Luxembourg’s housing market has weakened. In 2012, the average selling price of houses fell by 1.63% from a year earlier, after rising by 2.27% in 2011, 5.46% in 2010, and 3.03% in 2009, according to the Ministere du Logement. When adjusted for inflation, house prices actually dropped by 4.1%.
On a quarterly basis, house sales prices rose by 0.86% (0.06% inflation-adjusted) during the fourth quarter of 2012.
By property type:
- The average sales price of apartments dropped by 0.9% (-3.4% inflation-adjusted) in 2012 from a year earlier.
- Holiday homes saw the deepest decline, with average sales prices falling by 7.9% (-10.2% inflation-adjusted) in 2012.
The number of one-dwelling residential building permits dropped 9.3% y-o-y to 1,263 buildings in 2012, according to the National Statistical Institute. On the other hand, the number of two or more dwelling residential building permits rose by 18.2% to 395 buildings.
The housing market is projected to deteriorate further in 2013. In 2012, Luxembourg’s economic growth slowed, with real GDP expanding by just 0.11%, according to the IMF. Real GDP growth is expected to slow further to 0.05% in 2013.
Interest rates sharply down!
Luxembourg’s mortgage interest rates fell to an average of 2.4% in Q2 2009, in line with ECB key rate cuts, from 4.5% in Q4 2008. Most loans in Luxembourg are variable rate, rendering households very sensitive to interest rate changes. Credit conditions had tightened in early 2006, and by Q3 2008 mortgage interest rates had rose to 5.2%, from 3.7% in Q1 2006.
The average loan-to-value ratio stood at more than 85% in 2008, with around 50% of all mortgages had a loan maturity of 25 years and over.
A large mortgage market
Luxembourg’s mortgage debt as percentage of GDP has greatly increased over the last ten years, from 22% in 1999 to 40% in 2008. Mortgage market growth continued in 2008, despite the economic downturn, although at a slower pace. The value of loans for house purchases rose 7.6% in 2008, down from 22% in 2007, bringing the value of outstanding mortgage loans to €14.9 billion.
Rents unaffected by large supply increase
Average rents were relatively unchanged in Q2 2009, due to the regulated rental market despite an increase in the newly-built properties, by 91.7% in available houses for rent, and by 60% increase in available apartments for rent between Q2 2008 and Q2 2009. The enormous increase in supply of houses can possibly be explained by the preference of the residents of Luxembourg. That is, most of the residents are attracted to houses.
According to Observatoire de l´Habitat , average house rents were up 0.49% in Q2 2009 on the year, while apartment rents were down by 0.95%, . In March 2009, rental yields in Luxembourg ranged from 3.6% to 5.2%, according to Global Property Guide research, with 40 sq. m. apartments having the highest yields.
Homeownership in Luxembourg is relatively high, with 74.7% owner-occupancy, according to Banque Centrale du Luxembourg. 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.
Tax changes are boosting supply
With a 2,586 sq. km land area (about the size of Paris Metropolitan Area), land is scarce in Luxembourg, and the price of land available for construction significantly affects house prices.
To encourage construction, a “super-reduced” tax of 3% was introduced in 2002 on construction and renovation. The government also reduced capital gains tax on the sale of real estate, from 50% to 25%.
The total number of dwelling permits granted rose to 4,934 in 2007, from 2,956 in 2002. However, the total number of dwellings authorized in 2008 dropped to 4,017 units (1,125 houses and 2,743 apartments).
Then in 2012, the number of one-dwelling residential building permits dropped 9.3% y-o-y to 1,263 buildings, according to the National Statistical Institute. On the other hand, the number of two or more dwelling residential building permits rose by 18.2% to 395 buildings.
Still in recession
From average GDP growth of 5.2% from 1999 to 2007, the Grand Duchy entered recession in the last quarter of 2008, with GDP falling by 3.6% q-o-q, mainly due to the global crisis. The economic downturn continued in 2009, with GDP contracting 4%.
In 2010, Luxembourg emerged from recession with economic growth of 2.9%, and a further 1.7% economic growth is recorded in 2011, driven by strong export growth and robust domestic demand. However in 2012, economic growth slowed sharply, with real GDP growth of just 0.11%, according to the IMF.
The economy is expected to stagnate in 2013, with real GDP growth forecast of 0.05%, amidst the ongoing eurozone debt crisis.
In 2012, Luxembourg’s unemployment rate rose to 5.96%, the highest level in the past three decades, according to the IMF. In March 2013, the jobless rate reached 6.6%.
In April 2013, the country’s annual inflation rate stood at 1.72%, well below the 2% threshold, according to the National Statistical Institute. From 2010 to 2012, the annual average inflation rate was 3.14%, according to the IMF. The overall inflation rate is expected to be 1.7% this year.
This article was republished with permission from Global Property Guide.