The announcement of the first interest rate cut since 2019 in early June was, understandably, widely celebrated. It signalled not only potential relief for mortgage borrowers but also a decrease in inflation across Europe.
This was followed by some particularly surprising statements from the President of the Luxembourg Central Bank, who predicted two more rate cuts in 2024 and an additional three or four in 2025. These forecasts were tempered by Spuerkeess’ chief economist, William Telkes, on RTL Radio the following day.
If these cuts occur, they could significantly boost household purchasing power. It is important to note that when announcing the rate cuts, Christine Lagarde emphasised that the ECB was “not committing to any particular rate path in advance.” Despite this, economists have been quick to offer their opinions.
Financial experts suggest that the next opportunity for a rate cut could be in September. But would that truly be beneficial? While a further 0.25% cut might have limited immediate impact, the prospect of multiple consecutive cuts raises questions.
Mortgages are likely to remain relatively expensive compared to the period between 2017 and 2022, but they will be more affordable than in 2023. Idea Foundation economist Michel-Edouard Ruben highlighted in a paper published Wednesday that there is a notable wait-and-see attitude in the Luxembourg property market.
According to the document, it appears that, except for urgent sales due to bridging loans, separation, relocation, or imminent liquidity crises, property owners, both private individuals and developers, are holding off, waiting (hoping?) for property purchasing power to recover.
This recovery will not be driven solely by the anticipated interest rate reductions. The Luxembourg government has also introduced a package of measures aimed at increasing household solvency. This is particularly beneficial for developers and landlords who refused to lower their prices during the crisis.
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Ruben notes that this wait-and-see attitude is not only “freezing residential career paths” and harming the construction sector but also poses “an acute risk of future shortages.” Combined with successive interest rate cuts, this scenario could create the ideal conditions for another sharp increase in property prices in Luxembourg.
