The European Systemic Risk Board (ESRB) yesterday published its warnings and recommendations on medium-term vulnerabilities in the residential real estate sector in specific European countries; among them, Luxembourg received recommendations for addressing risks in this area.
The warnings and recommendations came after a European Economic Area-wide (EEA) assessment of the residential real estate sector in all the member states. Germany, France, the Czech Republic, Iceland and Norway received warnings, whilst the Benelux countries, Denmark, Finland and Sweden received warnings from the ESRB following the detection of vulnerabilities, which could result in systemic risk to medium-term financial stability.
In this context, the ESRB issued and made public a set of warnings and recommendations on 27 June 2019. The key vulnerabilities highlighted by the ESRB assessment are of a medium-term nature and relate to high or rising household debt, as well as the ability of households to repay their mortgages, the growth of mortgage lending, the loosening of lending standards and the valuation or price dynamics of residential real estate.
These warnings follow those issued by the ESRB in 2016, which revealed that the main vulnerabilities in Luxembourg's residential real estate sector included high housing prices and rising household debt. According to the recent assessment, which follows up on that of 2016, the sector remains characterised by housing supply shortages, increased housing prices and increased mortgage loans.
To address these structural weaknesses, the ESRB has recommended that Luxembourg implement a legal framework for borrower-based measures, activate borrower-based measures and apply structural changes related to mortgage loans and the residential real estate sector.
In response to these recommendations, Luxembourg's Ministry of Finance has noted that these risks to financial stability are "not unique to Luxembourg", and that it is important to consider the specificities of the Luxembourg context; the Ministry argued that recent years have seen a steady rise in residential property prices as driven by market fundamentals. They added that demographic factors and strong economic growth are the main drivers of sustained housing demand and thus, the government is working on various measures to increase the supply of housing on the market.
Moreover, the Ministry of Finance confirmed that the Banque centrale du Luxembourg (BCL) and the Commission de surveillance du secteur financier (CSSF) are closely monitoring developments in the residential property market. The subject is also regularly on the agenda of the Committee on Systemic Risk (CdRS). Indeed, the Luxembourg authorities, under the leadership of the CdRS, have taken a series of preventive measures to mitigate potential risks.
Nevertheless, the Ministry maintained that the authorities will remain vigilant with regard to the risks identified by the ESRB and will continue to monitor developments in the residential real estate sector in Luxembourg.
