In its 2020 article IV mission statement, published on 14 February following an official staff visit to the country, the IMF commented on the rapid rise in real house prices, which jumped 11.4% nationally over a year, and 18% in the capital. This rise which weighed “notably on affordability”.

The IMF wrote: “To expand housing supply, the authorities should modernise the rigid urban zoning and planning, and administrative rules. They should also move forward with amending the law on communal development that would help increase the supply of buildable land.”

The government is in the process of developing its latest housing strategy, the Pacte Logement 2.0, expected to be adopted by communes before the end of 2020.

The IMF report authors said they expected it to improve supply of affordable housing, “by linking subsidies allocated to municipalities to the amount of social housing built.”

“Establishing a national register for social housing is important to support these efforts. Finally, the sizeable tax incentives that support housing demand should be gradually phased out while sheltering the vulnerable groups.”

The IMF global housing watchdog data placed Luxembourg in third place for countries experiencing real house price increases over the past ten years, while Luxembourg experienced among the highest disparities between house price growth to income growth.

Tax incentives

Speaking at a Paperjam Club talk on real estate investment on 13 February, Luxembourg School of Finance director Ulf von Lilienfeld-Toal said there was no imminent housing bubble in Luxembourg because “Prices decrease as we go away from the centre and prices react to subsidies which is a sign of rational households,” he said.

He explained that research funded by the national research fund found the first-time buyer credit of €20,000 per person offered on the 7% title and notary deeds fee, had a strong impact on the amount households were prepared to spend on a property, pointing to rational behaviour.

He warned, however, that “If there was an economic shock in Luxembourg, the high leverage may amplify it.”

The full talk and a round table discussion can be heard in the podcast below.