Robust housing market in Luxembourg
Maria de Guzman | October 19, 2018
By property type:
- 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.
Moderate rental yields on residential property in Luxembourg
In Luxembourg, the gross rental yields on apartments - the return earned on the purchase price of a rental property, before taxation, vacancy costs, and other costs - range from 4.25% to 5.15%.
We have given you rental yields for Luxembourg as a whole, because unfortunately we weren't able to gather data for the city centre (the number of rental offers that we found was too small).
Our research shows that rental yields are somewhat higher on smaller apartments. Yields on the very smallest apartments are 5.15%, which is reasonable for such a prosperous country. But then smaller apartments tend to need more maintenance, so a higher yield is justified.
Rental yields on houses are lower, ranging from 3.8% to 4.5%. For houses there is little relationship between size and rental return.
Prices per square metre range for apartments in the city centre itself range from around €7,900 to €8,900 per square metre (sq. m.). Prices for apartments further out can be as low as €4,500 per sq. m. Prices in the Grand Duchy for houses range from around €3,600 to €4,000 per sq.m..
Round trip transaction costs are high in Luxembourg, by European standards. See our Property transaction costs for Luxembourg and Property transaction costs in Luxembourg, compared to the rest of Europe.
High taxes despite tax-haven reputation
Rental Income: Rental income is taxed at progressive income tax rates ranging from 8% to 42%.
Capital Gains: If the property is held for more than two years, capital gains tax rates are reduced to a maximum of 22.89%.
Inheritance: Inheritance of the spouse and children are exempt from taxation.
Residents: Residents of Luxembourg are taxed on their worldwide income at progressive rates, from 8% to 40%.
Buying costs are moderate in Luxembourg
Total roundtrip transaction cost, i.e., the cost of buying and selling, is between 12.21% and 16.41%, inclusive of registration fees (6% to10.2%) and estate agent's commission (3% plus 17% VAT).
Luxembourg has strong tenant protection laws
Luxemourg's rental market is strongly pro-tenant.
Rent: Rent control limits the amount of returns a landlord can receive. Rent can only be increased every three years.
Tenant Security: If evicted, the tenant is usually awarded generous compensation and more than sufficient time to look for an alternative dwelling.
Economy to rebound in 2018In 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%.