House prices grew 13.2% between the first quarter of 2020 and the year before. Photo: Matic Zorman
Luxembourg banks will have to rein in their lending for real estate loans after a systemic risk committee told them to cap loan-to-value ratios at 80%.
The loan-to-value (LTV) ratio is the portion of the property’s appraised value that isn’t covered by the down payment. For example, with a down payment of 20%, the LTV would be 80%.
Parliament only last year voted to give Luxembourg’s financial sector watchdog, the CSSF, powers to impose a cap on LTVs for banks under its supervision. The systemic risk committee (CdRS) is charged with assessing the necessity to introduce such a measure.
The decision to cap loan-to-value ratios starting next year would help prevent “excessive” household debt and restrain speculation in the market, the committee said in a statement on 18 November. The CdRS is chaired by finance minister Pierre Gramegna (DP) and also includes the CSSF, Luxembourg’s central bank and the insurance regulator, the Commissariat aux Assurances.
The CdRS, however, also recommended that first-time buyers should continue to have access to larger loans. LTVs for first-time buyers should be capped at 100%, it said, with a 90% limit for people buying a property they plan to live in. The 80% cap would therefore mostly apply to investors looking to buy to let.
“The measure taken by the CdRS in no way aims to deprive young households of the possibility of acquiring a main residence,” the committee said. Banks would nonetheless have the option of adopting lower LTVs across the board, it said.
The International Monetary Fund in a 2019 report warned that “rising housing prices pose affordability challenges and could exacerbate the already high household indebtedness.” In 2017, household indebtedness was at 170% of net disposable income, the report said further.
The high level of debt also poses a risk for lenders should households default on payments. At the presentation of its annual report in July last year, the CSSF warned action could be needed on loans if bank stress tests showed signs of overheating.
Over the last five years, housing prices have risen an average of 7.2% annually. In the first quarter of 2020, prices rose by 13.9% compared to the year before.