The Luxembourg real estate market is currently going through a difficult period with a sharp decline in transactions and high sales prices. This is what Robby Cluyssen said in an interview with Delano’s sister publication Paperjam.
Is the real estate market at a standstill, as some Luxembourg professionals are publicly claiming? The JLL expert doubts it. The fact remains that transactions have clearly decreased in 2022, with a sharp drop estimated in the last quarter of that year. Cluyssen pointed out that this situation is particularly difficult in the capital, but that there are still transactions in other cities, in the countryside and in the north of the country.
Despite the drop in transactions, selling prices remain a major concern for buyers. Robby Cluyssen noted that “prices have risen dramatically in recent years, with annual increases of more than 12% or 13%, which is not sustainable in the long term.” It’s a situation that has been triggered in part by interest rate rises. “With every percentage increase in interest rates, buyers lose 10% of their purchasing power,” he said.
With every percentage increase in interest rates, buyers lose 10% of their purchasing power.
So a buyer who, for example, had a purchasing power of €1m at the beginning of 2022, now finds himself with €200,000 less. In addition, banks are demanding even more guarantees than before, which is putting a strain on buyers.
Cluyssen also pointed out that the decline in the market is affecting all segments of the housing market, whether it be houses or flats, new or old. However, the decline is much more pronounced in the case of properties for sale before completion (VEFA), which are offered at very high prices.
Price indexation: an additional problem
In addition to interest rate rises, price indexation in the construction industry is another factor that weighs on buyers. This indexation has a significant cost for buyers, which explains why some did not position themselves on the market as long as there was price indexation.
Faced with this difficult situation, Cluyssen wondered whether a price cut is possible to revive the property market. However, he remains sceptical about this hypothesis, given that Luxembourg remains a specific case with a very strong demand and a healthy economy and financial situation. He believes that as long as demand remains high, prices will not fall. The market is showing strong demand, particularly due to the continued influx of expatriates, which is necessary to meet labour shortages in the country. According to Cluyssen, as long as demand remains high, prices will not fall.
13% fewer planning permissions means 27% fewer homes over nine months.
It should even be pointed out that the shortage of supply could accentuate the rise in prices, given the fall in building permits observed in 2022, with a 13% drop between the first and third quarters, which should increase again in the fourth quarter. This means that there will be a shortage of housing supply, which will push up market values: “13% fewer building permissions means 27% fewer homes over nine months.”
Market recovery?
A fall in sales prices remains the key to the recovery of the Luxembourg housing market. “I have heard that in the Netherlands, values are 20% higher than the assets themselves,” explained Cluyssen. So it would take a 20% drop to reactivate the housing market. “In Luxembourg, I can't imagine such a drop in prices,” said the JLL expert.
To revive the market, property developers, who are highly exposed to the local market situation, should also be creative. “Some projects have already been taken off the market to be redesigned and their concepts reviewed to better meet their targets. Unfortunately, such an approach is often limited to urban planning rules that do not always allow for a complete overhaul of real estate projects.” Developers are also looking to focus more on co-location offers to increase returns to investors.
Potential investors will not position themselves in the market because of the uncertainty. They might go abroad where the return is higher and the entry ticket lower.
“In Luxembourg, we need the private investor who buys and rents, who creates property for future generations. Unfortunately, the elimination of private investors from the market is an additional obstacle to the revival of the market,” said the JLL expert. “Potential investors will not position themselves in the market because of the uncertainty. They might go abroad where the return is higher and the entry ticket lower,” analysed Cluyssen.
In absolute terms, the Luxembourg real estate market is in decline, but high demand should keep prices high. The short-term recovery of the market remains unclear, and the ongoing shortage of housing supply may not help to reverse the trend.
This story was first published in French on . It has been translated and edited for Delano.