Illustrative photo of housing in Kirchberg Photo: Matic Zorman / Masion Moderne

Illustrative photo of housing in Kirchberg Photo: Matic Zorman / Masion Moderne

Rising housing prices are fuelling household indebtedness in Luxembourg, regulator CSSF said in its 2020 annual report published on 6 August.

Despite a slowdown in economic activity because of the coronavirus pandemic last year, the climb in housing prices continued unabated. In the last quarter of 2020, prices were 16.7% higher than during the same period the year before, by national statistics office Statec shows.

“House prices reached new heights,” the CSSF said in its . “This particularly strong growth rate stands out compared to previous years and contrasts with the contraction in economic growth caused by the pandemic.”

In the first half of 2020, a total of €3.3bn in residential real estate credit was granted, the CSSG said, an increase of 3% year-on-year. “It appears that on average around 39% of the annual disposable income is dedicated to debt repayment,” the financial sector regulator said.

Buyers are increasingly taking out larger loans. The loan-to-value ratio--the portion of the property’s appraised value that isn’t covered by the down payment--increased 4.2 percentage points in one year, reaching 77.6% in the first half of 2020.

Around one third of new loans in the first half of 2020 were granted with a loan-to-value ratio of more than 90%, meaning a down payment of 10% or less.

A systemic risk committee last year told banks to for real estate loans and to cap the loan-to-value ratio at 80% to prevent “excessive” household debt. The cap mostly applies to investors, however, as the committee said first-time buyers should benefit from a 100% loan-to-value ratio, with a 90% limit for people buying a property they plan to live in.

Household indebtedness was at 178% of net disposable income in 2018, the latest data available in the CSSF’s report. This was up from 170% the year before.

Parliament in 2019 voted to give the CSSF, powers to impose a cap on loan-to-value ratios for banks under its supervision. The systemic risk committee, or CdRS, is charged with assessing the necessity to introduce such a measure.

The committee is chaired by finance minister Pierre Gramegna (DP) and also includes the CSSF, Luxembourg’s central bank and the insurance regulator (Commissariat aux Assurances).