Why Housing Prices Are Not Considered for Wage Indexation

Data extracted from the national statistics agency Statec show that the average price of apartments in Luxembourg was €591,661 in 2020, an increase of 71% compared to €245,874 in 2012.

In comparison, the social minimum wage increased from €1,801 in 2012 to €2,142 in 2020, mere 18% increase.

Similarly, data extracted from the European statistics agency Eurostat show that the median equivalised net income increased by only 15% over the same period.

Together, the average apartment prices in Luxembourg outstripped the social minimum wages and the median equivalised net income by nearly a factor of four between 2012 and 2020. In other words, the increase in apartment prices was nearly four times higher than the increase in wages (the social minimum wages and the median equivalised net income).

Consequently, Chronicle.lu reached out to Statec and Luxembourg's Chamber of Commerce for their opinion on why are housing (houses/apartments) prices are not taken into consideration in the computing of automatic wage indexation.

One Statec representative clarified: "The automatic wage indexation is directly linked to the Luxembourg Consumer Price Index (indice des prix à la consommation national - IPCN). As the acquisition of houses and apartments are considered as an investment and not consumption, they are not covered in the Consumer price index in Luxembourg and in Europe. Rents however are included in the Consumer Price Index".

A representative of the Chamber of Commerce provided a similar explanation: "Housing prices (Houses/apartments/building land) are not taken into consideration in the computing of automatic wage indexation in Luxembourg, as they are not included in aggregate consumer price statistics and most notably the consumer price index (CPI or IPCN in french). The automatic-wage-indexation-mechanism is however based on the consumer price index. Please note that rents are however included in the CPI". The representative further elaborated: "This methodological situation is not specific to Luxembourg. In short, the reason behind this is that economists around the world have been debating for centuries whether housing should be considered to be an 'investment good', or rather an 'consumption good'. At the moment, houses/apartments/building land are classified as investment goods, while paying rent is considered to be an consumption expenditure".

The Chamber of Commerce reprsentative added: "As housing prices have risen sharply in many countries around the globe over the last couple of years, a growing amount of economists and scientists has called for an introduction of housing prices into the official consumer price indexes. However, it still remains a controversial topic, as introducing housing prices into the CPI is also linked with methodological issues".