Amidst a worsening recession and job losses, the Luxembourg real estate market has stabilized, posting slight housing price increases and rising sales. Key to this renewed stability has been a reduction in interest rates in a nation that possesses both a sizable mortgage debt and high levels of home ownership. For more on this, see the following article from Global Property Guide.
Luxembourg’s housing market stabilized during the first half of 2009, after two years of house price falls. House prices rose by 0.30% (0.42% in real terms) during the year to Q2 2009, according to Observatoire de L’ Habitat.
Apartment prices rose 0.74% (0.82% in real terms) y-o-y to Q2 2009. Dwelling prices were stabilized by lower interest rates, in a context where variable interest rates dominate. In 2007 and 2008, real house prices had dropped by an average of 2.2% each year.
House sales rose by 27% during the year, while apartment sales rose 64% in the year to Q2 2009, according to Marco Schank, Minister of Housing.
Luxembourg’s economy remained in recession to Q1 2009 with a 5.4% y-o-y contraction. Affected by the global financial crisis, STATEC, the national statistical institute of Luxembourg, forecasts a 4% contraction for 2009. Economic recovery is expected to begin in mid-2010.
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).
Still in recession
Luxembourg’s economy entered recession in Q4 2008 with a contraction of 3.6% q-o-q, after a 0.6% contraction in Q3 2008. The country’s economic slump continued in Q1 2009 with GDP contracting by 1.5% from the previous quarter.
The recession is expected to deepen during the rest of 2009, because the country’s financial sector, the main driver of economic growth, has been heavily affected by the global financial crisis. GDP is expected to contract by 4% in 2009, after a 0.9% contraction in 2008. Unemployment had risen to 5.4% by June 2009, up from 4.4% in 2008.
This article has been republished from Global Property Guide. You can also view this article at Global Property Guide, an international real estate analysis site.