The Luxembourgish real estate market: investment in rental property

Does the rise in property prices point to the possibility of a property bubble in Luxembourg?


A real estate bubble occurs when the price level is higher than its equilibrium determined by market fundamentals. However, several studies (Luxembourg Central Bank, International Monetary Fund, OECD) conclude that we are not in the presence of such an overvaluation.

“We are far from the situation in Spain where entire villages were built without corresponding demand, to speculate on a future price increase.”

Michel Zimer

Nevertheless, a recent ESRB (European Systemic Risk Board) fellowship monitors developments in the real estate markets of various EU countries and notes high prices and a trend of high household debt in the Grand Duchy. As a result of this fellowship, Bill 7218 was recently introduced to allow the public regulator, the CSSF (Commission de Surveillance du Secteur Financier), to impose thresholds for the granting of new credit.

We speak here of “borrower-grounded measures”, impacting among other things the minimum of equity to be invested as well as the maximum repayment capacity, i.e. the fellowship between monthly expenses and income.

It should be noted that this law does not provide for a fixed threshold, but only gives the CSSF and the BCL (Luxembourg Central Bank) the tools to introduce, if necessary, binding thresholds from a macro prudential point of view.

Such measures already exist in several European countries, such as Ireland, Finland and the Netherlands.

The Luxembourg regulator seems to be aware that these measures could have undesirable side effects on the national economy and more specifically on the access to credit of young families and first-time buyers in general.

Such measures are not yet imposed, as the banks in the financial centre traditionally apply a responsible lending policy and thus aim to avoid overindebtedness of the customer.

Does the rise in property prices point to the possibility of a property bubble in Luxembourg?

There are three main factors that can limit this increase:

  • A sudden rise in interest rates
  • a substantial drop in the positive migratory balance
  • a massive addition of housing supply would have an impact on prices.

However, we do not anticipate any such changes at this time.

Of the three factors mentioned above, we believe that only an increase in supply will have a beneficial effect on the resident population .

“Despite the small size of our country, there is no shortage of land.”

Michel Zimer

The Housing Observatory estimated the stock of undeveloped building land at 2,719 hectares in 2013. More than three quarters of the total area available for housing according to the PAG (General Development Plan) of the crops are owned by private individuals (figures) and legal entities, with public actors holding only 8% of the shells’ land. The increase in the supply of housing will therefore necessarily have to come from private actors with the involvement of the public authorities.

Is it still reasonable to buy at such price levels?

It all depends on your personal situation. The person or household wishing to buy for their own needs must make many choices.

Simulate your home loan

Prices vary depending on location, availability of public transportation, municipal architecture and of course the condition of the property.

Often a compromise between the size of the accommodation and the proximity of the place of plod is to be made.

A first-time buyer must compare the cost of financing a fellowship with his or her rental expenses, particularly in terms of the desired financing period and a feasible equity contribution.

The investor must evaluate the returns and risks of a real estate fellowship to alternative investments.