The residential property market in the 3rd quarter of 2022

The Housing Observatory has just published a report which draws up an inventory of the residential real estate market in the 3rd quarter of 2022. This study is based, on the one hand, on the data collected by STATEC and the Housing Observatory, in collaboration with the administration of Registration, Domains and VAT, as regards the activity and the sale prices of housing (from notarial acts). On the other hand, it mobilises data provided by the real estate portal Immotop.lu as regards the advertised rents of dwellings (from real estate advertisements).

1. The number of housing sales

Activity on the property and land markets is down overall compared with the third quarter of last year, but the extent of this decline is very heterogeneous depending on the segment. It is in the market for the sale of flats under construction that the reduction in activity is the most significant compared to the third quarter of 2021 (-36%), but also compared to the levels before the health crisis.

With 1,307 flat sales, the number of transactions is down by 17.7% compared to Q3 2021.

The financial volume corresponding to these transactions (almost 907 million euros in the third quarter alone), on the other hand, has only fallen by 13.4% compared to the third quarter of 2021, which reflects the increase in the average prices of flats sold (despite a fall in the share of flats under construction, which are more expensive on average).

In the existing flat segment (1,010 sales this quarter), the number of transactions has only moderately decreased compared to Q3 2021 (-10.0%), and remains close to the average of the years before the health crisis (1,077 existing flat sales on average in Q3 over the years 2017 to 2019) ;

It is therefore in the new-build segment (VEFA) that the number of sales has fallen very sharply compared to Q3 2021 (-36.4%) to reach only 297 sales this quarter. This figure is well below the average for the years prior to the health crisis (671 sales of flats under construction in Q3, on average over the years 2017 to 2019). This is the lowest number of sales ever achieved since the Land Registry file became available, along with that of the 3rd quarter of 2009 (when the number of transactions was exactly the same as today, i.e. 297 sales of flats under construction).

This drop in activity on the market for flats under construction is part of a trend that has been observed for eight quarters. It can be explained by a combination of several factors, notably: 1. a decline in the attractiveness of rental investors due to the rise in interest rates (which makes property investment more expensive, and at the same time certain alternative investments relatively more profitable); 2. 3. the uncertainties about the future price of a home bought off-plan, due to indexation to construction prices, which may have led some buyers to switch to the existing housing segment.

In the house sales segment (consisting mainly of older houses), the decline in activity is also visible compared to the third quarter of 2021: the number of house sales is down by 12.6% in the third quarter of 2022 compared to the same quarter in 2021. Activity is at a fairly low level compared to the years prior to the health crisis (760 sales this quarter, compared to an average of 940 house sales in Q3 over the years 2017 to 2019). The financial volume associated with these transactions has fallen much less sharply (only -3.5% compared to Q3 2021), which also reflects an increase in average house sale prices.

On the other hand, activity in the market for the sale of building land also slowed sharply in Q3 2022: -25.1% compared to Q3 2021. With 406 building land transactions in Q3 2022, activity is at a lower level than in the years preceding the health crisis (an average of 478 building land sales in Q3 over the years 2017 to 2019). The decline in the financial volume associated with these transactions is very similar to that of the number of transactions: -25.0% between Q3 2021 and Q3 2022. This reflects a certain stability in average building land prices, which is however difficult to equate with a stability in the valuation of these plots: average prices are also influenced by compositional effects (displacement of sales, differences in the surface area and potential constructibility of the plots sold, etc.).

2. Housing sales prices

The hedonistic house price index provided by STATEC (including both existing houses and those under construction) rose by 11.1% between Q3 2021 and Q3 2022.

In detail, the increase in the indices over one year amounted to :

• +8.3% for existing flats ;
• +7.9% for existing houses;
• +18.3% for flats under construction (VEFA, Ventes en Etat Futur d'Achèvement).

The aggregate increase over one year thus remains strong, in line with that recorded in previous quarters. Compared to the previous quarter, the aggregate increase is +2.2%.

The price index thus continues to grow, but at a more moderate pace, in the existing flat segment (+2.0% over the quarter). In the house segment, there was a slight decrease over the quarter (-0.5%), which may indicate a deceleration in the coming months.

On the other hand, the rise in prices seems particularly "abnormal" in the segment of flats under construction: +18.3% over twelve months, and even +6.1% over the 3rd quarter of 2022 alone (compared to the 2nd quarter of 2022). Interviews with real estate professionals suggest that a change in the contracting system could partly explain this price increase: until now, developers offered VEFA construction contracts including a clause indexing prices on delivery on the basis of the STATEC construction price index. It seems that several developers have put an end to this system, with the aim of guaranteeing more visibility for the final client in his future price. In return, the price fixed at the time of the signature of the VEFA contract has become more expensive.

Furthermore, the sharp rise in the price of flats under construction must be seen in the context of a sharp fall in activity in this segment: the majority of developers have obviously chosen not to lower the sale prices of properties on the market, even if this means facing difficulties in selling them.

It should also be noted that these price increases relate to notarial deeds recorded in the 3rd quarter of 2022, and therefore to compromises of sale signed for the most part before the end of July 2022. The effects of the increase in variable rates (later than that of fixed rates), and their impact on access to credit for households, will only be reflected in the statistics for the 4th quarter of 2022.

Moreover, while the rise in house prices remains strong over a year, it is part of a strong inflationary outlook for consumer prices: inflation measured by the National Consumer Price Index (NCPI) rises to 6.7% between Q3 2021 and Q3 2022. The rise in house prices is therefore only slightly higher than that of the basket of goods reflected by the NICP, which does not include the sale of housing (except indirectly, via loan interest and rents), which is considered as an investment and not as consumption.

On the other hand, the advertised price indicators (derived from real estate advertisements transmitted by Immotop.lu) show a clear slowdown in the rise in prices in the 3rd quarter of 2022: +3.5% for the house advertised price index and +1.6% for the flat advertised price index compared to the 3rd quarter of 2021 (with in both cases decreases in advertised prices in the 3rd quarter of 2022 compared to the previous quarter). This deceleration in listing prices should logically be reflected in the prices recorded on notarial deeds in the coming months. An aggregate fall in sales prices in the first half of 2023 cannot therefore be ruled out. A continuation of the adjustment through quantities (drop in the number of transactions) and/or an adjustment through prices (drop in selling prices) is likely in the medium term, given the strong increase in the cost of credit for buyers.

3. Advertised rents for flats

Advertised rents for flats (from real estate advertisements transmitted by Immotop.lu) increased fairly significantly in the 3rd quarter of 2022: +2.1% compared to the previous quarter. Over twelve months, the increase in advertised rents remains, however, significantly lower than the increase in housing sales prices and also than the 6.7% increase in consumer prices measured by the NICP over the same period. In Q3 2022, the advertised rent indicator for flats thus increased by 4.7% compared to Q3 2021.

At the same time, advertised rents for houses have remained stable over the last twelve months (+0.1% between Q3 2021 and Q3 2022). It should be noted, however, that the advertised house rent indicator is very volatile. Short-term fluctuations are strong in this limited segment: only 13% of rental advertisements have been for houses since 2010 in Luxembourg, and this proportion has been falling sharply for several quarters. The indicator of advertised rents for houses is therefore currently indicative of a very limited market.

It should be stressed that these are the rents requested by lessors for new rental contracts. The increase in rents during the course of a lease (for tenants who do not change accommodation) is also very moderate: it is even today well below inflation on consumer goods according to STATEC figures (+1.7% for the rent index between the 3rd quarter of 2021 and the 3rd quarter of 2022, compared to +6.7% for inflation on consumer prices measured by the NICP).

Source: Analysis report #4: "The residential property market in Q3 2022" available on https://logement.public.lu/fr/publications/observatoire/rapport-analyse-4.html