Residential property prices in Luxembourg saw a sharp decline in 2023, accompanied by fewer mortgages issued and rising rental prices, according to the Luxembourg Financial Sector Supervisory Commission (CSSF) in its published on 19 September 2024. And this, despite robust macroprudential measures aimed at maintaining financial stability. Year-on-year, residential real estate prices fell significantly, with decreases of 1.7% in the first quarter, 5.9% in the second and 13.6% in the third quarter of 2023. While property prices dropped, rental costs increased, resulting in a continued decline in the housing price-to-rent ratio, a trend that began in the third quarter of 2022.
The overall volume of real estate transactions also plummeted in 2023, with the number of new mortgage loans dropping by 43% compared to 2022.
Total mortgage loans amounted to €4.6bn in 2023, down sharply from €8.2bn in 2022, as uncertainties surrounding real estate prices and borrowing capacity, exacerbated by rising interest rates, dampened market activity.
Debt-to-income and loan-to-value ratios
The CSSF’s report also highlighted a decline in the average debt-to-income (DTI) and loan-to-value (LTV) ratios. The average DTI fell from 1,016% in the second half of 2022 to 841% in the first quarter of 2023. Similarly, the average LTV ratio decreased from 72.4% to 70.3%.
However, the share of loans with an LTV ratio above 90% grew from 24% to 25%, impacting both first-time buyers and the buy-to-let segment.
Debt burden
Despite the broader decline in debt levels, the debt-service-to-income (DSTI) ratio rose by 2% in the first half of 2023, reaching 45.1%, reflecting the impact of rising interest rates. However, the average maturity of new residential mortgage loans remained stable at 20.6 years.
The loan-service-to-income (LSTI) ratio, which measures the percentage of income spent on servicing mortgage payments, remained largely unchanged at 36.0% in the first half of 2023, compared to 36.1% in the second half of 2022. The LSTI ratio for first-time buyers, however, saw a sharp increase from 39.4% to 45.6%, while for the buy-to-let market, it decreased to 23.2%.
Household indebtedness
The CSSF report also noted an increase in household indebtedness. In the first half of 2023, 17% of new loans were granted to households required to spend over 50% of their income on mortgage repayments, up from 11% in the first half of 2022. Despite this, only 1.6% of residential mortgage loans were classified as non-performing by the end of 2023, with the CSSF crediting stabilising factors such as government aid, robust household balance sheets and the low proportion of bridge loans, which accounted for only 3.8% of total loans.
Variable rate loans made up 35.7% of all mortgages at the end of June 2023, a decrease from previous years. The CSSF warned that rising interest rates or declining purchasing power could expose certain households to unsustainable loan arrangements.
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Commercial real estate
The commercial real estate market also suffered significant contraction in 2023. The total transaction volume fell to just €472m, well below the €1bn achieved in previous years and even further from the €2bn mark seen in 2018 and 2019. This downturn was attributed to rising interest rates and increasing uncertainty regarding the future demand for office and commercial spaces.
To address vulnerabilities in the commercial real estate sector, the CSSF actively contributed to initiatives both at the national and European levels, including recommendations from the European Systemic Risk Board (ESRB). The CSSF worked with the Committee of Systemic Risk (CDRS) to tackle issues outlined in recommendation ESRB/2022/9, which focused on vulnerabilities in the commercial real estate sector within the European Economic Area (EEA).
The report noted that macroprudential measures introduced in recent years have bolstered the resilience of Luxembourg’s financial sector. Among these, CSSF regulation , which imposes loan-to-value limits on residential mortgages, contributed to a reduction in leverage within the real estate market. Additionally, the 15% minimum risk weight applied to banks using the internal ratings-based approach played a key role in reducing financial risks. The countercyclical capital buffer was maintained at 0.5% to safeguard the banking sector’s resilience against cyclical risks. At the close of 2023, the credit-to-GDP ratio fell to 91.3%, down from 98.1% in 2022, reflecting reduced credit activity in the economy.