Delano recently sat down with Rudolphe Aben, founder and managing director of Nextimmo.lu and the former head of Wedo.lu--a portal connecting construction companies with tradespeople--to assess the current state of Luxembourg’s residential real estate market. With a background that includes a role at the real estate listing website Immotop.lu, Aben’s extensive experience in construction, property listings and valuations, gives him a well-rounded and close perspective into grand duchy’s housing sector.
In a recent interview, he highlighted that the housing market is currently undergoing significant changes, facing challenges such as heightened construction and material costs in the post-pandemic era, stringent bank lending criteria due to rising mortgage rates and a consequential downturn in property prices--with a cumulative decline of 25% since October 2022. This complex situation presents a mix of potential risks and opportunities for both buyers and sellers in the market, said Aben.
Kangkan Halder: Can you describe the major transformations, challenges and opportunities currently occurring in Luxembourg’s residential real estate market?
Rudolphe Aben: The property market in Luxembourg has unique characteristics due to its small size and the limited amount of buildable land. The rise in the price of materials as a result of the covid-19 pandemic has led to an almost unjustifiable increase in construction costs. Compared to neighbouring countries, construction costs in Luxembourg are now two or even three folds higher. In addition, exorbitant land prices make it virtually impossible to build affordable housing. The rise in interest rates has exacerbated the problem. On the one hand, it has become almost impossible to secure loans from local banks, and on the other hand, the prices of new properties cannot be reduced as developers have made significant investments in their projects. This situation is jeopardising many projects and is far from being resolved.
As for [existing] properties, most banks refuse to finance the acquisition of properties with low energy performance (classified below category G). Uncertainty about the true value of these properties is weighing on the market and banks are reluctant to finance overvalued properties. Owners forced to sell are now being forced to cut prices by 20% to 30% from their peak in 2021 in order to avoid further debt. Buyers with the necessary funds are taking advantage of these opportunities by negotiating down prices as solvent buyers have become scarce.
I have observed a decline of about 2% per month since October 2022, which amounts to a decline of about 25% so far.
What are the main factors contributing to the stagnation of property sales in Luxembourg? How long do you anticipate this situation will persist, and do you foresee any further deterioration?
The low interest rate policy caused house prices to rise between 2020 and 2021, reaching their peak. However, since the rise in interest rates from April 2022, house prices have stagnated and then started to fall. I have observed a decline of about 2% per month since October 2022, which amounts to a decline of about 25% so far.
How can we explain this decline? Firstly, the fall in demand due to the tightening of credit. Secondly, some homeowners had to show flexibility by accepting lower offers, especially when their bridging loans were at stake. The same applies to households forced to sell their property due to exceptional circumstances, such as divorce. The statistics we have access to, derived from notarial deeds, have a six-month lag, which explains the discrepancy between the official figures and the reality of the market.
The future of the property market will depend on two key factors: the stabilisation or even reduction of interest rates, and a downward correction in market prices to restore balance in terms of monthly payments for buyers.
Given the continual rise in rental prices, do you believe that ‘buy-to-rent’ investors are displacing potential buyers who aspire to become homeowners?
The rise in interest rates has slowed investment in buy-to-let. With a yield of 3%-4%, this type of investment offers an additional lever, namely the potential for property prices to rise, generating capital gains on resale. When the future of the market seems uncertain, investors tend to opt for other investment products with higher returns. When a middle-class individual is denied a mortgage, renting remains their primary option. As a result, the strong demand for rental properties has led to rising rents, and given the limitations of the Luxembourg rental market, this increase could continue in the coming months. In order to expand the country’s rental market, the government would be wise to implement measures that incentivise investors by offering significant tax benefits.
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Could you provide your insights on the potential market correction in house prices that you expect? How might this differ between apartments and freestanding houses?
The balance between the rise in interest rates and the fall in prices is around -30% compared with the peak at the end of 2021. We can therefore assume that this decline will be the bottom and that the market will regain its momentum.
It is also important to note that some property owners will prefer to wait for the right time to sell and may decide to take their property off the market. Such a reduction in supply could help to stabilise prices and open up the prospect of a new upturn in a year or two. However, I do not believe that we will see the double-digit annual price increases of the recent past. As far as the price difference between apartments and houses is concerned, it has always existed. On average, a house always costs more than an apartment, but the price per square metre is lower for a house. This difference will continue to exist in the coming years, but it can be assumed that the demand for apartments will prevail, as their average price is more affordable than that of houses.