“Probably” no housing bubble in Luxembourg
by Stephen Evans
“The risk of a sharp fall in property prices in Luxembourg is probably limited, at least in the short term, notably due to demand being well supported by strong population growth and limited supply.” This is a quote from the recent Annual Stability Review report by the Luxembourg Central Bank, suggesting that this country is not experiencing a speculative housing price bubble.
This is not a comment on whether prices are “fair” or “right for society”. It is just a view on whether they are being boosted in an unsustainable fashion by excessive borrowing, as they were pre-crisis in the US, Spain and Ireland, and probably are now in China. Nevertheless, care is always advisable and buyers should think deeply before making the biggest investment of their lives.
Prices are rocketing. On average, the Central Bank reckons average purchase prices were an inflation-adjusted 11 percent higher in 2014 than in 2007. This is despite properties becoming cheaper in 2008 and 2009. The result is that an average 100m2 flat in the capital is going for more than 660,000 euros and a 150m2 house retails at more than 775,000 euros (figures from the Housing Ministry's Habitat Observatory - observatoire.ceps.lu). Prices are about 35-50 percent less than this when you go 20km and more away from the capital.
There is no sure way of spotting a price bubble. Over the long run, prices generally move in step with average incomes and are reflected in changes in rents. The Central Bank points out that prices are now about 20 percent above their long term averages on these measures. Normally this would point to a speculative, borrowing driven bubble. But the bank pointed to fundamentals of restricted supply and growing demand.
The killer fact is that between 2001 and 2011, the national statistics office calculates 27,000 homes were built, while the country acquired 37,000 new households (i.e. everything from single people to four generations living under one roof). This was before the latest spurt of immigration, which has seen the population rise by nearly 2.5 percent per year since 2011. As well, the average household size is falling as more people now live on their own.
Plus, the statistics office reckons the rate of home building has actually fallen since the crisis. There are ambitious plans to boost supply on the Kirchberg and the new Cloche d'Or development, but will these be enough to satisfy demand?
The scramble to buy has been boosted further by stunningly low interest rates of 2-3 percent fixed over 10 or even 20 years. Plus, you get an income-tax break on your mortgage payments, making it even less attractive to rent. That said, rental values have not kept pace with purchase prices due to the rental market here being one of the most restricted and regulated in Europe.
The conclusion is that if you buy, there probably wont be facing negative equity unless something goes horribly wrong with the European or Luxembourgish economy. Probably.