In a lengthy report on Luxembourg's stability programme, the European Commission criticises soaring property prices, which have a direct impact on residents' budgets and debts.

Becoming a homeowner in Luxembourg is not something that anyone can do. And even those who can afford it often have to keep a close eye on their budget.

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

In this document, the Commission highlights several factors that could cause imbalances in the country's economy. One of them is household debt. The report notes that "the sustained strong increase in housing prices has exacerbated concerns about overvaluation and the high level of family debt". The latter has now reached 174% of households' disposable income, one of the highest rates in Europe.

The source of these concerns is naturally the surge in property prices. The "extended period of rising prices", fuelled by demographic changes, the country's economic growth, and the demand for housing exceeding supply have led to "an accumulation of overvalued house prices while household debt remains very high". In the first quarter of 2021, prices had increased by 17%. Hence the Commission's satisfaction that the increase is slowing down.

A drop 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 soared in recent years," and some people are forced to "dedicate a large percentage of their income to debt repayment." This situation "could deteriorate, particularly in times of increased interest rates or economic hardship," according to the report. Especially given the unique nature of real estate loans granted in Luxembourg: around 30% are at variable rates and hence 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 loans "are concentrated in a small number of national banks", which justifies "continuous monitoring". Fortunately, Luxembourg has 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 deter from the fact that Luxembourg has a lot of work to do: housing is expensive and thus not very accessible, especially for those with low incomes. This also explains why housing remains the number one concern of the Grand Duchy's residents.