Residential real estate continues to be a significant household expense for both homebuyers with and renters, particularly as has consistently lagged behind population growth in Luxembourg. A poorly supplied market not only hinders newcomers but also makes it difficult for companies and businesses to attract talent, raising concerns about economic growth.
Interestingly, the evolution of on the property listings website Immotop.lu, which is also used as one of the data sources by the Housing Observatory of the ministry of housing and spatial planning, appears to outpace the rental index compiled by the national statistics bureau, Statec. Using 2015 as the base year (with all rental prices set at 100), Statec reported that the rental index had risen to 113.29 as of September 2024, indicating that housing rentals have increased by only 13.29% over the past decade. In contrast, examining the monthly averages of rental prices on Immotop.lu in euros per square metre reveals that market prices have surged nearly 58.7% during the same period.
It is important to note that this discrepancy also affects wage indexation. Increases in the national consumer price index (NCPI) determine when automatic wage indexations take place, even though the rental index contributes only a small portion (6.4%) of the overall NCPI.
The index
A representative from Statec clarified that the ‘rental index,’ compiled in accordance with European regulations, is based solely on current lease contracts obtained from a survey of approximately 1,000 renters in the grand duchy. As a result, this index represents the entire rental market, encompassing both new and existing rentals. In contrast, data from Immotop.lu focuses solely on ‘future’ contracts, the spokesperson told Paperjam.
According to an earlier from Statec in 2019, it is crucial to differentiate between advertised rents in property listings and the rents of ongoing lease contracts, as these represent two distinct concepts with significant differences in the amounts payable. In 2018, the advertised rents for apartments were, on average, 61% higher than those of existing contracts, at €1,611 compared to €998. For houses, this disparity increased to 92%, with advertised rents at €2,805 compared to €1,462. This discrepancy between the flow of new rents and the stock of existing rents is not surprising, as the former reflects the rent that households must pay upon signing a contract, while the latter analyses the rents of all ongoing contracts, noted Statec.
Rental inflation, as determined by the index, remains low primarily because rental prices are rarely adjusted during current leases, explained Statec. Adjustments can only occur every two years, following negotiations between the landlord and tenant. Additionally, automatic rent indexation--based on factors such as the consumer price index or sliding salary scale--is prohibited by law.
Not unique
That said, low rental inflation in Luxembourg is not unique as neighbouring countries have also seen similar trends, with the exception of Belgium, where annual rental price increases averaged 5% through 2023 and remained above 4.5% as of September 2024.
When compared to headline inflation--the Harmonised Index of Consumer Prices (HICP), representing overall inflation--rental inflation showed only a marginal increase in 2022. However, in 2023 and 2024, the rental index has gained momentum, especially in France and Luxembourg, data shows.
Statec explained that the rising ratio of rental index to headline inflation across these countries is largely due to lower overall inflation, with Luxembourg experiencing a sharper decline than its neighbours. This trend suggests that despite factors like economic conditions, employment rates and regional supply-demand dynamics, rental inflation is gradually beginning to outpace broader economic inflation.