The European Central Bank’s successive increases in key interest rates have wreaked havoc on the Luxembourg property market. At a time when the country is mired in a construction crisis and bankruptcies are piling up, the new coalition is looking for solutions to revive the country’s economy. Negotiations are going well according to the two parties involved, but time is running out. Particularly for households suffering the consequences of these increases at the end of each month.
Last year, 46% of new mortgages in the Grand Duchy were at variable rates, according to figures confirmed by the Luxembourg Central Bank. These include variable-rate loans as well as the famous bridging loans. This is a solution that generally allows individuals to buy a property before selling their current home.
For those affected, the situation is dire: they have seen the value of their current property plummet while at the same time suffering an explosion in their monthly repayments. This creates a significant “gap” in the financing plans of these households, who “often have to rely on their reserves” to avoid defaulting on their payments, explains Pierre Clément, director of real estate agency Nexvia.
There are also cases where households are no longer able to repay the bank. “If your interest rate has risen from 2% to 5%, your monthly payment will have increased by more than 50%", notes Clément. Those who no longer have the means “are going to have to sell their property at a loss” and are therefore likely to have “a residual debt with the bank”.
The “typical case”, according to the agency manager, is a family with a child who moved to Luxembourg a few years ago. “They bought a flat, then the family grew and so they bought a new house.” The transaction took place two years ago. At this stage, the flat was valued at €1 million, enabling them to buy a house for €1.5 million from a developer.
Except that in the meantime, the market has “reversed”. The flat, valued at €1 million in 2021, “is now selling for €800,000". Added to this is the indexation of construction prices. The family thus ended up having to pay €1.7 million for their house.
“There are therefore €400,000 to refinance with the bank ... at current rates”, Clément points out. Not to mention the fact that the family has been hit hard by the rise in interest rates after having taken up a bridging loan to be able to afford this operation.
And so the project of a lifetime is turning into a nightmare. “Some people are going to have to sell everything, and that’s a real human tragedy,” says the Nexvia director. “Because we mustn’t forget that the house for which they paid €1.7 million might only be worth €1.5 million in the meantime”, he further points out.
In this context, Clément was keen to return to statements recently made by Finance Minister Yuricko Backes, who played down the problem of bridging loans. “If we take the figures relayed by the minister herself, 4.5% of borrowers were having difficulty repaying their loans. That’s one borrower in 20, which is a lot!”
And they are not the only ones to suffer the consequences of rising interest rates. Though rare, there are households who have borrowed largely at variable rates. And then there are those who bought off-plan and “will never be delivered” or “in many years’ time”, according to Clément, who referred to the bankruptcies that are currently undermining the construction sector.
At best, affected owners find a builder to finish the work. At worst, “the completion guarantee becomes a repayment guarantee and then the insurer will choose, if the building work is not too far advanced, to reimburse what has been paid by the buyers”.
The problem in this case is that the reimbursement will be made “only on the construction share already paid”. The 40% share of the land is not covered. “We’re going to tell you that you’re still the owner, except that you’ve become the owner of a hole,” explains Clément. He added: “If I’d bought off-plan recently, I wouldn’t be sleeping soundly”.
Indeed, according to the Nexvia director, “there are rumours that certain developers” may have to file for bankruptcy “as we saw with Cenaro”. The branch manager says that every day he passes one of these “holes” in Gasperich, which in all likelihood will be resold for “much less than the purchase price, which is often inflated by the developers”. A veritable tragedy for the affected owners.
