Nuances of the Real Estate Market

Following our Horizons2024 conference in April 2024 and after reading some sensationalist communication around our industry, we felt it important to offer a more nuanced view of Luxembourgish residential real estate. We do not believe that a bubble is crashing so hard that only the most desperate are buying, nor do we believe that all challenges are behind us and the future is entirely promising. There are signs of a recovery and elements that are lagging behind.

Update on the purchasing capacity

Let's consider a scenario involving first-time buyers with a down payment of 200,000 € and a monthly net income of 10,000 €, who are purchasing an existing property with a 25-year loan. Link to a simulation.

As Vincent Quillé from credihome highlighted in a back-of-the-envelope estimation, the rates increase from 1.5% to the peak of 4.5% strongly eroded their purchasing capacity by 23%, from 1 230 000 € to about 940 000 €.

However, a combination of factors is now helping this couple regain similar purchasing power. "On the supply side, prices have dropped by 15%. On the demand side, changes such as the Bëllegen Akt increase of 20 000 € per head, the drop in long-term mortgage rates to around 3.7%, and the salary indexation, are respectively and cumulatively recovering 4%, 7% and 6% in purchasing power."

As a result, the property our couple could afford before now costs 1 045 000 €. And their purchasing capacity of 1 230 000 € is now of 1 100 000 €, roughly the same amount. Their loan however has been upgraded from 4 370 to 4 700 € / month.

Signs of recovery

During the first quarter of 2024, credihome has seen a significant increase in engagement, doubling their number of contacts compared to the same period last year. Mr Quillé observed, "people are looking for the right opportunity, but they are here".

Nexvia, the real estate agency, partners with several banks in the valuation process for mortgage analysis. Pierre Clement from Nexvia comments: "although the trend in prices is not yet crystal clear, our preliminary analysis suggests that the price drop for existing properties may have ended, with an increase in volume internally and across our partners."

The impact on properties varies significantly: "Buyers are becoming more selective, influenced by the greater choices available. Location and energy classes are key factors now. Recent bankruptcies have also cast doubt on some smaller developers".

The market dynamics for existing properties and off-plan projects are diverging. While the number of transactions for existing properties decreased by 35% over 12 months, it was 68% for off-plan properties.

However investors - who often invest in off-plan projects - can now claim a Bëllegen Akt of 20 000 €. But whether this will be sufficient to rejuvenate interest remains uncertain. Kathia Robert from the well established Thomas & Piron was cautious in her comment: "We are noticing more calls, we need to see if the recently voted goverment plan translates into more sales."

Signs of doubt

Julien Licheron from LISER was also cautious in his analysis: "the off-plan volumes are so low that it is hard to present a conclusion on its apparent robustness on prices. The low volume makes us wonder if we are actually dealing with comparables. The evolution of practices, like a kitchen at the expense of the seller, complicates the calculation of an average price. From our understanding the off-plan market is close to a standstill, the price adjustment that has occurred on the existing market has not occurred for off-plan properties."

Referring to the couple mentioned earlier, the off-plan property they could have afforded as an off-plan investment only dropped 7.5% according to the STATEC index. Mr Clement nuances here "however some investors, that have an existing buy-to-let property, can see 2024 as a year to sell and reinvest. Beyond the Bëllegen Akt, they can also fully preserve their capital gain by reinvesting into sustainable or social housing this year."

Every financial news outlet is hung on central bankers’ every word. The awaited rate cut seems to always be postponed and Mr Quillé advises his customers, "Many are preoccupied with interest rates. While indeed significant, it is crucial to remember that central banks' actions mainly affect variable rates. However most people finance their property on fixed rates, and those rates already have priced the expected rate drop. Essentially, any expected changes to fixed rates for 2024 are probably already in effect."

Opinions

Fräntz Miccoli from Nexvia shared a few statements about his team's vision of the market’s future.

"Neither do we have a crystal ball, nor a crystal-clear view. But here are a few uncertain views."

1. The registered prices published every quarter by the Observatoire de l’Habitat are published with a lag, we expect them to still show a price drop at the publications of June-July and maybe September-October. Unfortunately, this will likely convey a skewed reality through press coverage in a moment where the market could be recovering.
2. Compared to long term rates, short and variable rates are going to drop at a much quicker rate in Q2, Q3 and maybe Q4 of this year.
3. The return to a two digits real estate price growth will not be seen for the next four years and hopefully more. Possibly with the exception of a technical rebound out of the market low point.

The caveats on this are extreme scenarios where an economic crisis would require heavy central bankers’ intervention, lowering the rates drastically and as a consequence pushing the prices up ; or where international tensions would escalate into wider armed conflict that pushes us into a more unknown territory.

All things being equal, the certainty is that we are and will be at a low point of construction of new dwellings that can only reinforce the structural scarcity of housing in Luxembourg.