The year is ending on a mixed note in Luxembourg: the real estate and construction sectors are still in crisis, the GDP is historically low... but there are signs that invite optimism and suggest a very slight improvement for the coming year.

A lackluster end to 2023 for real estate

Real estate prices collapse

A clear testimony to a sluggish Luxembourgish real estate market is the drastic drop in prices and transactions recorded by the Housing Observatory for the 3rd quarter of 2023. Prices have fallen by 13.6% in a year, and all segments are affected: -7.7% for off-plan apartments, -12.3% for existing apartments, and -18.7% for existing houses.

This price trend is closely related to a significant decline in real estate activity in Luxembourg. For instance, the sale of off-plan apartments plunged by 59.9% in a year! Only 119 sales were concluded during this 3rd quarter of 2023, an unprecedented low since 2007! The same observation can be made for existing properties, although the decrease in transactions is less staggering (-31.9%) with 690 sales.

How to explain such a situation? According to analysts from the statistical institute, not only do successive interest rate hikes reduce the borrowing capacity of prospective property owners, but they also make rental investment less attractive.

In Luxembourg, interest rates are rising

The thorn in the side of the Luxembourgish real estate market is, of course, the still particularly high interest rates. According to the latest figures from the Banque Centrale du Luxembourg (BCL), in October 2023, the variable interest rate on housing loans granted to households increased slightly by 3 basis points in a month, reaching 4.74%.

For fixed interest rates, a moderate increase of 10 basis points was recorded, bringing the rate to 4% in October 2023. Fixed-rate housing loans, with an initial fixation of more than 10 years, experienced an increase of 14 basis points, reaching 3.96% in October.

In Luxembourg, October was marked by a slight increase in housing loan rates, highlighting the need for borrowers to stay informed about market trends. It's not easy to know exactly how the Luxembourgish real estate market will evolve in 2024. According to the Luxembourgish statistics institute, STATEC, what can be said is that 2024 could herald the beginning of the end of the recession.

The foundations of a recovery in 2024

Addressing the wounds of 2023

According to the latest forecasts from STATEC, the year 2024 could mark a recovery in the country's overall economy, but it would still be far too moderate to envisage a real improvement.

The coming year will have to make up for the negative economic growth in Luxembourg in 2023: STATEC believes that the GDP for 2023 will hover around -1%, a more pessimistic forecast than last September. The poor performance of the financial and construction sectors has significantly contributed to weighing down the country's economy. If the construction and real estate sectors are struggling, it is undoubtedly due to the particularly high interest rates that hinder new residential investments.

According to the latest economic report from STATEC, in 2024, economic growth would barely reach +0.5%, far from the 2% needed for a real recovery. At the same time, residential investment would remain too low, and building permits too few to hope for a real rebound in the real estate market in 2024. And yet, STATEC remains somewhat optimistic.

Encouraging signs for a recovery

Alongside the shadows highlighted by the last Economic Outlook of the year, there are signs that suggest a calm period from mid-2024.

Inflation is resolving itself all over Europe, following the easing of energy and food prices. Inflation forecasts for the eurozone are 5.6% in 2023 and 2.0% in 2024. For Luxembourg, STATEC expects inflation to be 3.8% for this year and 2.6% for 2024.

Good news for mortgage loans, as if inflation resolves itself, the European Central Bank (ECB) will be more inclined to stop the rise in its key interest rates, or even lower them.

And if the decrease in key interest rates indeed starts in the second quarter of 2024, as the markets currently anticipate, and continues thereafter, STATEC expects a gradual recovery of the Luxembourgish market from the second half of next year. Thus, the construction of new housing could resume, boosted by the continued demographic growth of the country, the increase in disposable income, and the propensity of Luxembourgish households to save.