“An additional capital requirement of 0.5% was imposed on the six designated banks in order to reduce their probability of default” on property loans, stated the financial regulator CSSF in its 2022 annual report. Photo: Matic Zorman / Maison Moderne

“An additional capital requirement of 0.5% was imposed on the six designated banks in order to reduce their probability of default” on property loans, stated the financial regulator CSSF in its 2022 annual report. Photo: Matic Zorman / Maison Moderne

In 2022, Luxembourg’s real estate market sent mixed signals. Residential property prices rose, but new residential loans significantly declined. Commercial real estate activity also remained below its pre-pandemic levels, according to the Luxembourg Financial Sector Supervisory Commission (CSSF).

The highlighted the intricate relationship between the national real estate market and the financial sector. In the residential real estate category, prices increased by 3% for existing apartments and 2% for apartments still under construction. However, 17% compared to 2021, totaling €9.3bn in 2022, down from €11.2bn the previous year, Luxembourg’s financial regulator stated.

The debt conundrum

The report noted that surged to a worrying 181% of gross disposable income, with 140% of this being mortgage-related.

This makes households particularly susceptible to economic fluctuations such as , or , the CSSF cautioned.

Key risk indicators

In 2022, key indicators revealed a complex landscape for borrowers’ risk exposure.

On the positive side, the average loan-to-value (LTV) ratio, a crucial gauge of borrowing risk, fell by 3.4 percentage points from the first half to the second half of the year, settling at 72.4%.

This downward trend was consistent across both first-time buyers and the rental market. Additionally, the share of loans with an LTV ratio above 90% dropped from 26% to 24%.

Conversely, the debt-service-to-income (DsTI) ratio rose from 42% to 44%, indicating that households are allocating a larger share of their income to loan repayments.

The loan-service-to-income (LsTI) ratio similarly increased, moving from 34% to 36%.

As for variable interest rate mortgages, there was a shift in trends between existing loans and new issuances. While variable rate loans had been declining in recent years, this pattern was reversed in 2022, likely due to , as suggested by the CSSF.

Given these mixed signals, adverse factors like rising interest rates and dwindling purchasing power due to inflation could place households at risk of entering unsustainable loan agreements, warned the report.

Commercial real estate’s struggle

In the commercial real estate sector, the pace of recovery remained sluggish.

Annual transaction volumes for 2021 and 2022 stood around €1bn, only half of the €2bn in 2018 and 2019.

Factors such as the growth of e-commerce, the rise in remote work, and increasing mortgage rates have contributed to this sluggish performance, according to the financial regulator.

Given the significant household exposure to real estate debt and challenges facing the commercial real estate sector, the CSSF reiterated that it continues its regulatory vigilance.

Following consultations with the Central Bank of Luxembourg (BCL) and acting on CdRS recommendations, the CSSF maintained a 0.5% countercyclical capital buffer to bolster the banking sector’s resilience.

The countercyclical capital buffer applies to six systemically important banks, namely Banque et Caisse d’Épargne de l’État (Spuerkeess), Banque Internationale à Luxembourg, BGL BNP Paribas, Clearstream Banking, RBC Investor Services Bank and Société Générale Luxembourg. These institutions collectively account for 25% of Luxembourg’s total banking sector assets, making their stability vital in this volatile climate.

By the end of 2022, the credit-to-GDP ratio had decreased slightly to 97.7%, down from 100.1% in 2021.

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