The government on Thursday announced tax and financing measures intended to move thousands of approved homes into construction, after higher borrowing costs left developers unable to secure enough buyers or bank funding to begin work.

“The digger is moving in some places, but not everywhere,” Housing and Spatial Planning Minister Claude Meisch said. “We currently have thousands of homes that are authorised but are not being built.”

Property prices had not fallen far enough to offset higher borrowing costs, he said, leaving developers unable to reach the advance-sales thresholds required by banks. Finance Minister Gilles Roth described the package as a “booster” intended to restart construction and expand the supply of more affordable homes.

The government is reviving housing tax incentives despite criticism that earlier schemes strengthened demand and drove prices higher. “That was often a justified criticism from international institutions,” Meisch said. He argued that price, rent and construction-cost limits would stop the latest tax advantages from being absorbed into higher property prices.

The announcement follows planning reforms presented six days earlier, including a national building code and shorter municipal procedures. Those measures are intended to ease future approvals; the latest package targets homes that have already cleared the planning system but remain unbuilt.

Relief once work starts

For three years from 16 July, private buyers purchasing an off-plan home after construction has begun will pay property registration taxes only on the value of the land, provided no more than 80% of the building has been completed. The relief will apply both to owner-occupiers and to individuals buying residential property to rent out.

Buyers currently pay the 7% charge on the land and the share of construction already completed, making a home more expensive once work is under way. “People often lack confidence that the building will be completed at all,” Roth said. “The real interest in buying usually comes once the digger is moving.”

The separate Bëllegen Akt tax credit for people buying their own home will rise from €40,000 to €45,000 per person. Both changes are intended to apply from 16 July, with buyers able to claim the additional relief retrospectively once the legislation is published.

A social test for private rentals

The government will introduce an 8% VAT rate for privately financed rental housing that meets a new set of social conditions. Homes must be no larger than 120 square metres, remain below a price ceiling based on their region and size, and be rented for at least ten years.

Rent will be capped at 4% of the amount invested, below the 5% ceiling in the current rental law. Tenants will need a Housing Ministry certificate showing that their income does not exceed the seventh income decile, leaving around 70% of residents potentially eligible, according to the ministers.

Meisch described the measure as having “a clear social purpose”. “We want the prices that are paid to be below the median for the respective regions,” he said. “We also want the rent that is paid to be reasonable.”

Rental investors will also receive a revised accelerated-depreciation allowance. Construction costs of up to €600,000 per home can be written down at 6% a year for six years, but the entire amount will qualify only for the ordinary 2% rate if the construction value exceeds that ceiling.

“This government wants to boost construction, but it does not want to finance luxury,” Roth said.

The reduced VAT rate will apply only after the legislation takes effect. For purchases made in 2026, investors will be able to choose between the existing depreciation regime and the new allowance; purchases from 1 January 2027 will fall under the new system.

Closing the mortgage gap

The mortgage amount used to calculate the government’s interest subsidy will rise from €200,000 to €250,000 generally and to €300,000 when at least one borrower is aged 35 or under. The additional amount recognised for each dependent child will increase from €20,000 to €30,000.

The eventual subsidy depends on income, household composition and the share of the interest rate eligible for support. Meisch said a couple with one child and net annual income of €79,000 could receive about €400 a month.

“That can make the difference between the bank saying yes to the loan or sticking with no,” he said. Buyers aged 35 or under purchasing affordable or moderately priced homes from the Housing Fund or public housing developer SNHBM will also become eligible for homeownership and savings bonuses.

“Many young people are asking whether their future is in Luxembourg,” Meisch said. “They ask whether they can continue to live in Luxembourg or whether they will have to move across the border.”

Banks will still decide whether to lend after assessing each customer’s finances. Roth said ministers were discussing market conditions with lenders and the Systemic Risk Committee, but could not order a bank to approve a mortgage.

Buying three to build ten

The government will add €300m to the programme under which it buys homes off-plan from private developments. Meisch said the initial €480m allocation had been almost exhausted, with 830 homes bought or reserved and around €470m committed. The additional money is expected to support about 500 more homes and will be spent over several years as construction progresses.

The programme will also be widened to allow the government to buy a small number of homes within a larger development rather than taking an entire building. Meisch gave the example of purchasing three apartments in a ten-home project, helping the developer reach the advance-sales threshold required before a bank releases construction finance.

“We may buy three out of ten, but all ten will then be built,” he said.

Some homes may later be sold under affordable or moderate-price ownership schemes, with the government retaining the land under a long-term lease and a right to buy the property back. Maximum purchase prices will also vary by region after the existing national limits left the government unable to compete for projects in and around Luxembourg City.

The off-plan programme is intended to deliver homes faster than the country’s largest public developments, many of which will take a decade or more to complete.

A bond without a full price tag

Part of the expanded programme will be financed through a €250m retail housing bond planned for early 2027. Interest will be exempt from the usual 20% withholding tax, following the model of the government’s defence bond.

Roth said the bond would allow residents to take part in financing affordable housing while earning interest. Its term has not been fixed and could be three or five years, while the interest rate will be determined shortly before issue according to market conditions.

Roth estimated the gross tax cost of three measures at €35m: €5m for accelerated depreciation, €15m for the larger Bëllegen Akt credit and €15m for the registration-tax relief. He did not provide a full cost for the package, which also includes the reduced VAT rate and stronger mortgage support.

No offsetting tax increase or spending cut is planned. Roth said renewed construction should protect jobs, increase transactions and reduce part of the estimated revenue loss.

The price test

Ministers argue that the risk of another price surge is limited because thousands of homes already have permission but cannot secure financing. Meisch said the government had avoided the broad tax measures criticised in the past, instead tying the VAT and depreciation incentives to price and cost ceilings.

The government has promised parliament that it will evaluate the measures and intervene if they are abused or begin to inflate prices. Roth was more direct when asked whether the package could protect developers who had paid too much for land.

“It is like the lottery: you cannot always win,” he said. “This is not a package intended to guarantee them a profit.”

The government has not estimated how many additional homes the measures will produce each year. It still has an ambition of 6,000 new homes annually, although it acknowledged in June that it lacked a current, consolidated estimate of the construction sector’s capacity.

Roth said the first measures could reach the cabinet by the end of July before being submitted to parliament.