2023 has been a rough year for the housing sector, affecting many. Although highly anticipated, the decrease in prices did not have the expected results.

In Luxembourg, both house and apartment prices have experienced a significant decline in 2023, marking the first such downturn since 2015. This drop in the real estate market was a direct outcome of the surge in interest rates. While initial reactions happily welcomed the news of reduced property prices, the ensuing reality proved challenging.

Despite the consistent drop in housing prices, interest rates saw a staggering threefold increase, reaching as high as 5% by the end of 2023. This posed a substantial setback for households looking to purchase or invest in the housing market.

Following the European Central Bank's initial policy rate increase, experts have observed a 30% reduction in households' borrowing capacity. In short, a household that could secure a 1 million euro loan in 2022 would now only be eligible for approximately 700,000 euros. This development has proven to be difficult for many, particularly against the backdrop of the overall instability experienced throughout the year.

Last year, experts anticipated a decline in interest rates as early as spring 2023, a projection that ultimately did not bear fruits. Instead, interest rates have exhibited continual fluctuations, hovering between 4% and 5% throughout the year. Consequently, numerous individuals have had to defer their property projects, as housing prices remained elevated and interest rates showed no signs of relenting.

This situation has notably displeased many developers and builders. With a preference among buyers for purchasing existing properties, some businesses faced closures or resorted to selling assets. In contrast, major retailers swiftly responded by maintaining high VEFA (sale of property for future completion) prices.

Data from the Housing Observatory underlines the challenges in the housing market. Despite a significant decrease in the sales of new units by nearly 60% (- 59,9% to be exact) prices have experienced a more moderate decline of 7,7% for VEFA apartments between the third quarter of 2022 and 2023.

In comparison, prices for existing apartments have seen a more substantial decrease of 18,7%, according to the Observatory. Despite this widespread downward trend, the market has struggled to bounce back.

The third quarter of 2023 marked the lowest quarter for purchasing power, and this situation did not show signs of improvement by the year-end. Instead, there has been a notable shift towards the rental market, offering some relief to landlords but causing concern for renters who have witnessed a surge in rents since the second quarter of 2022.

The housing sector is experiencing significant strain, with rents reaching record highs. A recovery for the housing market appears distant, posing a genuine concern for the country's real estate landscape.

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