2nd May 2024

And what if 2024 became a good year to buy a real estate property?

Rising interest rates, a crisis-ridden construction sector, falling property prices: that's the current situation on the property market. But what does this mean for private individuals looking to buy a property in 2024? We spoke to Claude Hirtzig, Head of Retail & Professional Banking, at Spuerkeess, to find out more about the development of the real estate market and housing financing.

Since last year, particular attention has been paid to the Luxembourg real estate market. While the sector has indeed seen a sharp slowdown, mainly as a result of the rise in interest rates, some comments suggest that it is virtually impossible to finance a home, but this proves to be neither accurate nor justified.

1. As we approach mid-2024, what can we expect in terms of changes in the housing sector?

Three years of a pandemic, the war in Ukraine and other political and economic phenomena have led to inflationary trends taking the upper hand in recent years. Interest rates subsequently soared, loans became much more expensive, and as a result, the Luxembourg real estate sector experienced a reversal of the trends that had marked the previous decade: prices and the number of new real estate acquisitions fell, and companies in the sector struggled.

By analysing the situation carefully, however, we can see that 2024 has started on a much more positive note. First of all, long-term fixed interest rates have already fallen significantly and, most importantly, our analysts expect the European Central Bank to cut rates as early as June. This will undoubtedly lead to a decrease in the cost of variable-rate real estate loans. While we do not expect to see rates at levels as low as two years ago, this will nevertheless give consumers some respite and make real estate acquisitions attractive again, given the expected reduction in financial expenses.

In addition, the government has declared housing as an absolute priority and new measures aimed at reducing housing costs in household budgets have been approved. These measures will be retroactive as of January 1st and will be adopted by the summer. For the construction sector, other specific measures will help to revive construction, thus increasing the supply on the market over time.

Thus, with no other news that might disrupt current forecasts, 2024 will likely be the year that shows the first signs of a revival in the real estate market for individuals looking for housing, including real estate investors.

The measures that will be implemented this year:

  • The increase in the “Bëllegen Akt” tax credit to EUR 40.000 per person (currently: EUR 30.000), i.e. EUR 80.000 for a couple.

  • Increase in the tax deductibility of interest on debit balance to EUR 4.000* (currently EUR 3.000) for the first year of occupancy and the following five years; to EUR 3.000* for subsequent years (6-10 years) and EUR 2.000* thereafter.

  • Reduction in the capital gains tax rate to a quarter of the overall tax rate for a minimum holding period of two years.

    • Example: If the year in which the real estate sale is taxed, the overall rate is 36%, the real estate sale will be taxed at 9%. If the capital gain equals an exemplary amount of EUR 200.000 (possible allowance already included), the new amount of capital gain taxed will be: EUR 200.000 * 9% = EUR 18.000.

However, from 1 January 2025, capital gains will be taxed at half the overall rate (held for more than five years).

*the related amounts are to be multiplied by the number of persons in the taxpayer’s household.

2. Has it really become more difficult to apply for a housing loan in the current environment?

One might think that as a result of the rise in rates and the economic environment, banks are asking for more guarantees to provide financing. However, this is not the case. The criteria to obtain a home loan are still the same and the acceptance rate of loan applications remained unchanged, despite the challenging environment. But it is true that there have been far fewer requests from our customers. Nevertheless, we expect this situation to change.

Indeed, inflation, and thus the rise in the cost of living, has had a real impact on household budgets and consumption, with a decline in purchasing power observed in recent months. However, increases in nominal wages and government announcements since early 2024, as well as a turnaround in the interest rate situation, have led to a renewed interest in real estate financing for our customers. Our advisors have also noted a sharp increase in appointment bookings since February, which makes us much more optimistic for the coming months.

3. Do you need to have savings to obtain a loan from the banks?

When a financing application is submitted for approval, the Bank effectively takes into account personal contributions. These must first be sufficient to cover the ancillary costs involved in the real estate purchase, such as notary fees that cannot be paid with the loan. In addition, banks are required to comply with certain regulatory criteria. Thus, a household that was previously an owner and changes residence must contribute at least 10% of the value of the acquisition, in the form of personal assets. However, for a first purchase, it is in principle possible to apply for a loan without having additional personal savings that would make it possible to finance part of the purchase.

We believe that it is nevertheless desirable to have certain reserves to cover any unforeseen events that may arise. Thus, saving before a real estate acquisition is an advantage, whether in the form of traditional savings, investments in securities or a home savings plan.

It is, however, important to know that even if the buyer provides no capital, the bank has the discretion and obligation to assess whether the file is suitable for financing by the buyer. It is also notable that the banker and the buyer ensure that the cost of the loan is borne by the customer over time; in other words, that the customer’s solvency is guaranteed while keeping sufficient income to maintain an adequate lifestyle.

4. What do you advise clients who wish to apply for financing?

As buying a property is a major financial commitment, usually the most important one in life, we have noted our customers’ significant need for advice in this area.  Given the current economic and financial environment, with all these uncertainties, this need is all the more pronounced.

Our advisors are therefore available to customers to assess their borrowing capacity and guarantee them the necessary support for their future property acquisition plans.

So don’t hesitate to contact us and tell us about your home ownership plans!

Spuerkeess is committed to being a reliable partner, as well as a trusted advisor for all our customers’ projects.

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