Don’t expect the coronavirus to dampen the real estate market too much, says Julien Licheron, a researcher at the Luxembourg Institute of Socio-Economic Research.
Property prices rose by roughly 15% during the year to June 2020, despite the pandemic. “However, the lockdown and health crisis already had an impact on the residential market; not on prices, but rather on activity,” said Licheron, who studies the housing market. “The number of sales--for apartments, individual houses and land plots--was 20% lower in the second quarter of 2020 than it was the same quarter the year before.”
Blip in the market
The slowdown was short-lived. “It seems that the number of sales went back to quite good levels after the lockdown,” he told Delano in mid-November.
Luxembourg’s economy will shrink in 2020 and grow at a slower rate in 2021, but that likely will not curb housing costs. Licheron reckoned that the annual “increase in housing prices, around 4.5% to 5%, between 2010 and early 2018, was clearly explainable by the mismatch between housing needs and land and housing supply. The housing needs were fuelled by very strong demographic growth, while housing supply was rather inelastic.”
Licheron continued: “Over the last 24 months, however, the--two-digit--increase in housing prices was more difficult to explain… fundamentals did not change that much, but we saw a rush on rental investments by--mostly local--private investors on newly built dwellings. It transmitted to the secondary market--the one for existing dwellings--quite quickly, since the remaining supply was very scarce in the primary market--the one for newly built dwellings.”
What factors could dampen or accelerate housing inflation in the coming years? Unsurprisingly, it will come down to the pace of population and economic growth on the one hand, and increased housing stock on the other.
“The strength and duration of the current health crisis, and its effects on the economic fundamentals, will of course have a strong influence on the residential housing market, Licheron stated. “Historically, the housing market is fuelled by demographic growth; if the demographic growth rate remains strong in Luxembourg, housing needs will remain very important.” The grand duchy and its Greater Region neighbours are all expected to record GDP growth of 3.5%-5.8% in 2021 and 2.6%-3.5% in 2022. That will not relieve any pricing pressure.
“Housing demand is also made of rental investors,” Licheron continued. “Since it is highly probable that interest rates will remain low for several years, investment in the residential market may remain a safe asset with a satisfactory return rate.”
“On the supply side, the lockdown may have delayed some projects, but there are several big projects planned in the near future. I hope that housing supply will increase in the near future, but I can’t imagine that this increase in supply may generate over-supply,” he said.
No slowdown expected
While it is tricky to forecast the full impact of the covid-19 outbreak, “housing needs are still strong, the demand from rental investors is still strong, and the constraints on housing supply remain. That’s the reason why I do not see a strong probability that housing prices decrease in the near future.”
A version of this article was originally published in Delano’s January 2021 edition. Be the first to read the magazine by subscribing for home or office delivery here.