Given the significant evolution of the housing market in Luxembourg, Banque Internationale à Luxembourg (BIL) has created an IMMO Index that will deliver precise analysis of this market. While a lot of comments have been made with respect to the evolution of prices, until now there has been no economic indicator reflecting the trend in the Luxembourg housing market based on economic indicators. BIL, in collaboration with PwC Luxembourg, has selected the key data and relevant indicators to develop the BIL IMMO INDEX, a synthetic indicator of the market over the last 35 years.
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The BIL IMMO index allows retail, professional and institutional investors to immediately understand the housing market trend on the basis of economic ratios and accurate methodological analyses," said Marcel Leyers, Chief of Corporate and Institutional Banking at BIL. "BIL aims to make this index a benchmark for the national housing market, adding to its already extensive range of property financing solutions. Its development shows BIL's determination to further its commitment to supporting the local economy."
The BIL IMMO Index stood at +1.80 in the last quarter of 2016.
Source: PwC Market Research Centre
The index was 0.87 (0.93 at the time of publication and before data revision) in the last quarter of 2015, particularly due to the decrease in the number of building permits issued following the legislative change on housing VAT. The year 2016 was then marked by a strong rebound in the index, already observed at mid-year 2015 at 1.58 (1.44 when published). Since then, the increase in index value to +1.80 can be explained by the following trends:
- Real estate prices rose significantly in 2016, especially during the first half of the year. The rise in real estate prices is 7.7% between Q4 2015 and Q4 2016. In particular, the rise in old house prices was 9.1% year-on-year, while flat prices rose by 7.4%. During the same period prices of new dwellings increased by 6.3%.
- As a result, the house price/rent ratio also increased significantly, as the indicator used for rents rose very modestly by around 0.84% year-on-year.
- Despite an upturn in inflation (+ 1.7%) between the end of 2015 and the end of 2016, real price appreciation remains strong, pushing our house price/consumer price index to rise sharply. After a very strong acceleration during the second quarter of the year, it slowed down a little, especially during the third quarter, in parallel with property prices.
- The increase in the index is mainly the result of a record + 19.7% hike in the volume of mortgages between Q3 and Q4 2016, which is a + 25.4% jump year-on-year compared to the end of 2015. This means that current residential mortgages totaled an unprecedented € 2 billion in the last quarter of 2016. This compares with the growth in economic activity, boosting the ratio of mortgage loans to GDP.
- The index is also pushed up by the jump in construction activity, a robust + 5.7% year-on-year in the last quarter of 2016. This compares to total GDP growth of + 2.3% year-on-year in the fourth quarter of 2016. Gross value added for construction is 2.5 billion euros for all of 2016, the highest value ever recorded, even higher than the record set in 2014. However, there is a decline in the confidence indicator in the second half of 2016, which may signal a future slowdown.
- Finally, the increase in the index in 2016 is moderated by two successive decreases in the number of building permits issued during Q3 and Q4 - 1,208 and 1,000 authorisations, respectively - compared to 1,637 authorisations in Q2 of 2016.
Overall, the main boosters of the BIL IMMO Index in Q4 2016 were the steady rise in real estate prices and the boom in loans, although the construction sector also seems to be in good health. Our index has more than doubled between the end of 2015 and the end of 2016, which calls for vigilance over the risk of overheating in the near future. While somewhat concerning, this sudden acceleration can largely be explained by Luxembourg’s demographic growth and the economy’s good health, as well as the economic situation in Europe, which improved in Q1 2017. Indeed, unemployment has continued to fall and investors are becoming more confident after the period of doubt following the Brexit vote. The sharp rise in demand for loans as well as the surge in house prices demonstrates an appetite for real estate acquisition, presumably as an anticipatory effect of rising interest rates. However, on 8th June the ECB confirmed its intention to keep key interest rates at their current levels even after the end of its asset purchase program scheduled to expire in December 2017. Presumably, it seems as if rates will not rise in 2017 or even in the first half of 2018. Hence, it is more the increase in supply (of completed housing) rather than a moderation in demand that could dampen the rise in real estate prices in the Grand-Duchy in the coming months. This, coupled with the likely acceleration of national GDP, would help bring the BIL IMMO Index back to a more balanced level.
The lack of regional data does not permit the calculation of an index by region, as regional analysis is based on cross-analysis of the following variables:
- Demographics: population and demographic growth
- Prices advertised for the sale of houses and apartments
- Price advertised for rental homes and apartments
The regional analysis below is based on population data as of 1 January 2017 and the prices announced up to Q2 2017, as well as on recent developments. Price dynamics in each region are compared with national dynamics, and are crossed with demographic change. Risk levels are weighted on a scale of 1 to 5; the interpretation is as follows:
- Level 1: negligible risk of contraction in short-term price
- Level 2: low risk of contraction in short-term price
- Level 3: moderate risk of contraction in prices
- Level 4: average risk of contraction in prices
- Level 5: risk sustained contraction of prices
On the proposed scale, no region is currently estimated at a 4 or 5 risk of contraction in prices. contraction risk. The risks are negligible to moderate.
Please hover over the map to view our BIL IMMO Index analysis per region
We used STATEC for population data and the Habitat Observatory for advertised prices for sale and rental properties. Other factors such as regional economic dynamism and the number of completed residential buildings could be considered according to the availability of relevant data.
This data should be considered with caution since prices for sale and rent are advertised prices. In addition, the real estate market in Luxembourg reveals significant variations from one quarter to the next.