Real Estate Outlook in Luxembourg: Should you celebrate -1,5 %?

The long awaited, sometimes dreamed -or even fantasized, drop in real estate prices eventually materialized in Luxembourg. Is anyone really happy about it though?

Is it serious, doctor?

atHome reports are showcasing a dramatic decrease in advertised home prices ranging from 5% in Q1 to 7,5% in Q2. Advertised prices of rents on the opposite have been increasing enormously, up 11,5% on average in Q2, according to the same article[1]. Of course, these figures would scare the public quite quickly even though caution must be applied as those are country averages and prices advertised online.

The Statec index (based on actual notarial observed transactions) which was already slowing as per Luxembourg’s standards (+.5.5% year-on-year in the final quarter of 2022), also turned red with a -1.5% year-on-year fall in the first quarter of 2023, "a fall of just -0.4% for VEFAs", according to the Chambre Immobilière[2].

Although this is the first time this has happened since the third quarter of 2009, according to the Observatoire de l'Habitat, which recalls that at that time the country was paying "the consequences of the economic and financial crisis" that had hit Western countries particularly hard, "this adjustment is hardly surprising after several years of extreme price rises", says the Chambre Immobilière. Psychologically, this downturn, which comes after years of double-digit price rises, is anything but insignificant, and "contributes to the uncertainty felt", according to the Chambre Immobilière, again.

However, it needs to be qualified: existing homes (-4.3%) are dragging down the entire market, while year-on-year prices for other property types remain close to zero (+0.4% for existing flats and -0.4% for VEFA flats). "The market is therefore becoming a buyer's market, increasingly favorable for investor funds and large accounts, but also for anyone looking for investment opportunities with a good return and medium-term capital gains," emphasizes the Chambre Immobilière.

What’s next?

While the current situation can probably be attributed to a Bolt type interest rate rally, skyrocketing around 4% lately, there are some conjunctural factors and Luxembourg’s specific aspects to consider. Indeed, once central banks will ease out the current politic, we should mechanically see a more positive dynamic in all western countries. But how much will it raise in Luxembourg then?

The grand-duchy might have seen the impact of the government’s decision of making investment more difficult, topping up on already high prices (since 2021, tax deduction ceilings have been reduced for real estate investments). Less attractivity for investors eventually lead to lower construction volume and thus higher prices, as observed until last year. Of course, one need to remain careful when evaluating those effects, as they are not really back up by a lot of data. The increasingly longer delay to obtain building permits is surely not helping the offer to multiply neither. Both those factors have been limiting the number of constructions over the past two years.

Adding to this the high inflation, the shortage of raw materials and higher salary costs, 2022 was already looking as the worst year in a while for construction volume. Now the current year is breaking records.

According to estimates by the Féderation des Artisans and the Chambre des Métiers, the production of housing units will drop by almost 40% in 2023, from 3,800 to 2,300 completed units[3]. This from a reference year that was already pretty bad.

The current situation will also bear some long-lasting effects. The “purge” as some people are gladly calling it, is taking place. For those that never liked the pretentious smile of the street’s corner real estate agent when he enters his Porsche, indeed, he might be now using 95 e10 petrol rather than Power 100. Of course, this sector is seeing about 1,800 professionals that might be in some troubles right now[4]. The recovery for them should be quite quick though. More preoccupying are bigger construction groups like Cardoso filing for bankruptcy[5], alongside with developers like Cenaro[6]. Even if the latter’s bankruptcy can be linked to other factors and if many being in misfortune right now are so due to uncontrolled leverage or risky external financing (that were mostly concluded during the always-rising area that seemed never to be stopping), those missing companies will undoubtedly result in missing housing units over the next couple years. Also because of these psychological signs, and overall unstable economic environment, banks are now being more careful than ever and delivering loans in a way more restricted way, even for those who can still afford them.

What is then most likely to happen, in an environment of very low available units, and once the macroeconomics will start to ease, is of course a boom in prices. By which rate, remains to be seen, and will likely depends on the speed at which interest rates will start to decrease. Much is to bet though on the fact that the prices will dramatically raise, way more than on EU-average. Finished units will be at a long-time-not-seen low, prices stabilized, and salaries will continue to grow on average. Let alone any government initiative, after extensive talks and pushes from the sector’s representatives, to either facilitate construction permits for instance or ease deduction ceilings for investors so that the mixture could be perfect.?

In this scenario, if interest rates start easing but stay somewhere over 3% in 2024, new units’ prices will rise but perhaps still moderately. However, as soon as the conjuncture stabilize, the subsequent years might then see more pronounced spikes. In a more aggressive scenario, and if interest rates are declining faster, which is now rather unrealistic to predict, we could observe a tremendously sharper curve and prices rocketing to 10+ % very quickly.

So should we celebrate the current drop in prices? Well, for those that can cope with the much higher interest rates, there might surely be some more space for negotiation right now as there was two years ago. However, let’s not expect miracles, especially not in new units as construction costs raised so much over the last couple years that nobody will be giving exceptional discount. The existing housing market could offer some more specific opportunities as it also takes into consideration the psychological effect of the current situation on many private owners. Though, the decline in interest rates might be slower than expected and thus, the ability to refinance a loan at a lower rate should not be taken into consideration as a determining factor for now.

In sum, nothing changes under Luxembourg’s sun. Prices are still high and everybody is still wondering whether it is the right time to buy. At least it gave the most pessimists some insurance that no bubble is about to burst.

[1] https://www.athome.lu/blog/marche-immobilier/prix/prix-immobilier-luxembourg-2023/

[2] https://www.chambre-immobiliere.lu/les-nouveaux-logements-en-chute-libre-et-les-loyers-explosent/

[3] https://www.lessentiel.lu/fr/story/la-construction-de-logements-pourrait-baisser-de-40-en-2023-844044684094

[4] https://www.lessentiel.lu/fr/story/des-agents-immobiliers-au-chomage-partiel-au-luxembourg-ca-se-precise-146204823057

[5] https://paperjam.lu/article/manuel-cardoso-officiellement-

[6] https://lequotidien.lu/politique-societe/faillite-de-cenaro-des-victimes-sen-remettent-au-ministre-du-logement/