Among the vulnerabilities cited in the 27 June report by the EU financial system watchdog include increasing household indebtedness and growth in mortgage loans and house prices (albeit in the latter case, this growth has recently witnessed a deceleration). 

The ESRB states that there are higher levels of systemic risk within Luxembourg due to structural factors which include lack of housing supply and the possibility of overborrowing on mortgage loans, given the favourable tax deductibility of interest paid on such loans. 

Although measures have been taken to curtail exposures, the ESRB listed three recommendations Luxembourg could take on board to improve the overall situation. These include a legal framework for borrower-based measures, which has been proposed but not adopted; the activation of borrower-based measures; as well as structural changes, both to mortgage loans and the residential real estate sector. 

The report was one of six recommendations sent out (also to Belgium, Denmark, the Netherlands, Finland and Sweden), with specific warnings sent to an additional five countries (Czech Republic, Germany, France, Iceland and Norway). 

Follow-up since 2016

At the same time ESRB published a follow-up report on the evolution of vulnerabilities addressed by the body in 2016 in which it analysed actions taken by the countries in question, including Luxembourg. 

The report had warned about household indebtedness in Luxembourg even in 2016, which had been “very high relative to income compared with other European countries. House prices were increasing very strongly, reaching unprecedented levels and surpassing income growth”. As of Q4 2017, household debt reached 171% of disposable income, or +12% compared to three years prior.  

Vulnerabilities cited then also included the intense growth in housing prices, still a concern in part due to the pressure imposed by land availability and other supply-demand factors. Despite the slowdown in housing price growth from 6% in 2016 to 3% by 2018, “the long period of RRE [residential real estate] price increases is indicative of a build-up of overvaluation”, according to the report.