The Luxembourg Housing Market Reverses Overvaluation Trend

Discover how the Luxembourg housing market shifted from overvaluation, driven by data from the European Central Bank.

Luxembourg's housing market, which had been on a steady path of recovery for four consecutive quarters, took a surprising turn in the final quarter of 2023. Data from the European Central Bank revealed that the market experienced a reversal of overvaluation, particularly at the lower end of the housing spectrum. This shift was largely attributed to rising inflation and subsequent monetary policy decisions by the European Central Bank to increase key banking rates in the euro area, leading to a surge in mortgage rates.

As a result of these changes, several member states saw a decline in real estate prices, including Luxembourg. Average prices, loan volumes, and the number of transactions for both houses and apartments all decreased in the grand duchy. The situation became so dire that the government implemented various measures to address what was deemed a "housing crisis" by the end of January 2024. Despite the drop in average prices, the European Central Bank identified the residential real estate market in Luxembourg as the third most overvalued in the EU.

The ECB's assessment of overvaluation in residential property is a cause for concern, as it can lead to increased household indebtedness and potential risks to financial stability. Sharp price corrections during adverse market conditions could result in higher losses on defaults for banks and have broader implications on household wealth, confidence, and the economy as a whole. The ECB closely monitors potential overvaluation using a set of measures to assess this risk.

Data from the ECB indicated that overvaluation in Luxembourg had been decreasing until the last quarter of 2023, when the trend reversed. The increase in overvaluation at the lower end of the Luxembourg housing market was significant, while higher-end properties were moving towards fair levels. This shift may have been influenced by higher mortgage rates, which reduced the maximum loan amounts available and prompted potential buyers to show more interest in smaller homes.

Looking ahead, the increase in the 2024 "Bëllegen Akt" tax credit could sustain buyer interest in lower-priced properties, potentially leading to continued overvaluation, especially at the lower end of the price spectrum. Market dynamics will ultimately determine the trajectory of the housing market in Luxembourg.