RTL Today – Housing: the European Commission criticizes the indebtedness of Luxembourgers

In a long report on Luxembourg’s stability programme, the European Commission denounces the explosion in real estate prices, which has a direct impact on the budget and the indebtedness of residents.

Becoming a landlord in Luxembourg is not something that everyone can do. And even those who can afford it often have to watch their budget closely.

On Monday, the European Commission published its assessment of Luxembourg’s stability program for the year 2022.

In this document, the Commission highlights several factors likely to cause imbalances in the country’s economy. One of them is household debt. The report notes that “the sustained sharp increase in house prices has heightened concerns about overvaluation and high levels of family debt.” The latter now reaches 174% of household disposable income, one of the highest rates in Europe.

The source of these concerns is naturally the surge in real estate prices. The “prolonged period of rising prices”, fueled by changing demographics, the country’s economic growth and demand for housing exceeding supply, has led to “a build-up of overvalued house prices as household debt remains very high”. In the first quarter of 2021, prices had increased by 17%. Hence the Commission’s satisfaction with the slowdown in the increase.

A fall in property prices, according to the Commission, would put borrowers and banks at risk and prompt lenders to tighten lending conditions.

As a result, “family debt has skyrocketed in recent years” and some people are forced to “spend a large percentage of their income on debt repayment“. This situation “could deteriorate, particularly in times of rising interest rates or economic difficulties”, according to the report. Especially given the specificity of mortgages granted in Luxembourg: approximately 30% are at variable rates and therefore subject to interest rate fluctuations. Fortunately, these variable rates have remained stable for the time being… to the point of once again becoming more advantageous than fixed rates.

The Commission also notes that the loans “are concentrated in a small number of national banks”, which justifies “continuous monitoring”. Fortunately, Luxembourg benefits from a stable environment: “risks in the financial system are mitigated by effective supervisory frameworks and a resilient banking sector with well-funded banks”.

However, this should not prevent Luxembourg from having a lot to do: housing is expensive and therefore not very accessible, especially for people on low incomes. This also explains why housing remains the number one concern of the inhabitants of the Grand Duchy.

Julio V. Miller