Robust housing market in Luxembourg
The average buying prices for apartments in Luxembourg rose by 5.59% (4.46% inflation-adjusted) to €5,669 per square metre (sq. m.) during the year to Q1 2018, according to the National Statistical Institute (STATEC).
By property type:
Source: Statec Luxembourg
- Existing apartments´ average acquisition price surged by 7.82% y-o-y to €5,299 (US$ 6,172) per sq. m. in Q1 2018.
- New apartments´ average price rose by 2.42% y-o-y to €6,350 (US$ 7,396) per sq. m. in Q1 2018.
In 2017, property transactions surged by 16.9% y-o-y to 7,404 units, according to STATEC. This rise in demand is matched with last year´s increase in construction activity. The number of permits for one-dwelling residential buildings rose by 11.3% y-o-y, while permits for two or more dwelling residential buildings were up by 13.8% y-o-y in 2017, according to STATEC.
Last year´s rise in housing sector activity was partly encouraged by a tax reform, which came into effect on January 1, 2017:
- The taxable rental value has been abolished.
- The amounts of mortgage interest deduction related to a taxpayer´s primary residence are increased to:
- €2,000 (previously at €1,500) for the first six years of occupation;
- €1,500 (previously at €1,125) for the next five years; and
- €1,000 (previously at €750) in the subsequent years.
- The tax deductible on home savings contributions has been doubled, from €672 to €1,344 for individuals aged 40 years old and below. The €672 ceiling will still be applicable to taxpayers above 40 years old.
- For house sellers, the government has reduced the capital gains tax rate from 50% to 25%, for real property sales between July 1, 2016 to December 31, 2017. This tax regime was extended and now covers real estate sales up to December 31, 2018. The property should have been owned by the taxpayer for at least two years. Capital gains from the sale of a main residence are not taxable.
Record low interest rates
Luxembourg´s mortgage interest rates are at historic lows, having fallen to 1.86% in Q1 2018, according to the Banque Centrale du Luxembourg (BCL).
Most loans in Luxembourg are variable rate, so borrowers are very exposed to interest rate changes. The average loan-to-value ratio stands at more than 85%, with around 50% of all mortgages having loan maturities of 20 years and over.
Mortgage market still growing
Luxembourg´s mortgage debt as percentage of GDP has sharply increased from 22.5% of GDP in 1999 to 50.9% of GDP in 2017.
Moderate rental yields in Luxembourg
Rental yields in Luxembourg are moderate. Based on Global Property Guide research in May 2017, apartment rental yields range from 5.13% to 4.25%, with smaller apartments having higher yields. Houses have lower rental yields, ranging from 3.81% to 4.56%.
The average apartment rent in Luxembourg rose by 0.69% during the year to Q3 2017, according to the Ministere du Logement, while house rents went up by only 0.28%.
In Q3 2017, the average advertised rent for apartments was €1,469 (US$ 1,711) per month or around €21.25 (US$ 24.75) per sq. m. For houses, the average rent was at €2,822 (US$ 3,287) per month or €14.33 (US$ 16.69) per sq. m., according to the Ministere du Logement.
Advertised rents in Luxembourg City, the country´s capital, are higher. The city´s average advertised rent for apartments was at €1,710 (US$ 1,992) per month or €25.37 (US$ 29.55) per sq. m., while the average rent for houses was at €3,835 (US$ 4,467) per month or €17.69 (US$ 20.61) per sq. m.
Luxembourg City is the centre of rental market activity in the country, accounting for 46% of all apartment rental ads, and 20% of housing rental offers during the third quarter of 2017, according to the Ministere du Logement.
Most people live owner-occupied properties, with an owner-occupancy rate of 73.2% in 2016, according to the European Mortgage Federation (EMF). Tenants’ rights are well protected. Most property is rented unfurnished, but for furnished properties, the rent cannot be more than double the previous rate. Rents can only be increased every three years.
More houses, less apartments
In 2017, the total number of dwelling permits went up by 2.2% y-o-y to 4,953 units, according to the National Statistical Institute (STATEC). There was a surge in permits for houses, which increased by 11.3% y-o-y to 1,408 units. Apartment permits were 3,412 units.
Economy to rebound in 2018
In 2017, economic growth slowed to 2.3%, down from the 3.1% GDP growth in 2016, according to the National Statistical Institute (STATEC).
From 1999 to 2007, Luxembourg enjoyed robust economic expansion, with an average annual GDP growth of 5%. Growth since the 2008 crisis has been uneven. The economy started to expand again in 2012, posting GDP growth of 3.7% in 2013, 5.8% in 2014, 2.9% in 2015, and 3.1% in 2016. STATEC predicts 4.6% economic growth in 2018, due to the effects of the tax reform and improvements in the labour market.
The legacy of the recession years is relatively high unemployment, now at 5.6%, down from 6% in May 2017, according to STATEC.
In May 2018, annual inflation was 1.3%. The EC believes that inflation in 2018 will remain below 2%.