Is real state really expensive in Luxembourg? (Adapted from an article published by PaperJam, January 2012)

Almost everyone in Luxembourg complains about the prices of real estate properties. However, in order to analyze this topic with the necessary accuracy, we shall refer chiefly to statistical data rather than to anecdotes. Luxembourg Prime Minister Jean-Claude Juncker once said that the steady rise of real estate prices represents one of the major failures of his government. On the other hand, employers single out that the high costs of housing put an upward pressure on their employees’ wages. We also know that mortgage loans lasting for 30 years are no longer that rare and that young families are struggling to have access to housing more than their parents did in the past. Undoubtedly, real estate prices in Luxembourg are high. As per the figures provided by an ad-hoc observatory the average price for a single family home and for an apartment stands at 599’000 and 370’000 € respectively.

Does this mean that real estate is expensive in Luxembourg in comparison with the country’s general economic situation and the income of its residents or, in comparison with the figures and trends registered in the neighboring countries?

Statec – i.e. Luxembourg Statistical Office – collects data related to house prices by splitting such figures into two classes, i.e. residential and semi- or non-residential properties, thereby screening all transactions since 1975. Prices were multiplied by 13 between 1975 and 2010, with an annual average increase by 7.40%, and a real surge between 1998 and 2007. This is quite impressive but still it does not correspond to the expectations you may have had by taking a look at the prices displayed by local real estate agencies. This annual increase is higher than the figure registered in all neighboring countries, but very close to the evolution that branch has been going through in Belgium (6.27%) and in the Netherlands (5.04%).

Secondly, we shall compare such trends to the country’s general economic development. The increase registered in the prices of real estate properties (7.40%) is very much in line with the growth of the GDP calculated over that same period (1975-2010) which stands at an annual increase by 7.43% at current prices. We all know that the GDP does not necessarily represent the best indicator to measure living standards, and this is true even more in Luxembourg as the GDP includes the contribution of many non-residents who are working in the Grand Duchy.  

However, the database of the OECD provides us with a series known as “Disposable income per capita at market prices and national currency”. These figures should therefore in principle reflect the evolution of living standards and therefore also of the citizens’ purchasing power.

As for Luxembourg, the growth rate of disposable income stands at 6.31% over the period considered, which means that house prices have exceeded, over the past 35 years, the evolution of the living standards by only 1.03% a year. Additionally, as far as a comparison with the income of the local inhabitants is considered, house prices in Luxembourg have been evolving roughly in line with those of Belgium and France.

The analysis is only partial and there is still a lot of work to do. It does however come to the conclusion that if house prices are certainly high, they are not disconnected from the country’s economic development and are, in relative terms, rather in line with those of other countries. If prices are unaffordable, they were already 35 years ago.