After an in-depth analysis of recent developments in the residential real estate market in Luxembourg, the Systemic Risk Committee (Comité du risque systémique - CdRS) has recommended that banks cap Loan-to-Value (LTV) ratios at 80%.
The recommended measures are scheduled to be activated from 1 January 2021, in line with the recommendation sent by the European Systemic Risk Board (ESRB) in Luxembourg last year. The latter reported the existence, in the medium term, of vulnerabilities due to the sustained growth in house prices and a constantly increasing level of household debt. The ESRB stressed that such a potential threat to financial stability was not unique to Luxembourg, but was common to several EU Member States.
Over the past five years, residential property prices have continued to rise with an average annual growth rate of 7.2% (even reaching 13.9% in the first quarter of 2020). Over the same period, mortgage loans to households experienced sustained growth, including during the ongoing health crisis (up 9.4% in the third quarter of 2020).
To mitigate the increase in household indebtedness, the CdRS recommended that the financial sector watchdog, the Commission de surveillance du secteur financier (CSSF), set new conditions for the allocation of loans intended to finance the acquisition of real estate for residential use located in Luxembourg territory (borrower based measures). The main objective is to limit the emergence of excessive household indebtedness, which remains a factor in the decline in consumption and savings necessary for robust economic growth. It is also expected to help to curb speculation.
The LTV report that the recommendation invites the CSSF to put in place describes the relationship between the sum of all loans or loan tranches granted to borrowers of residential real estate and the value of the property at the time of the loan arrangement. This LTV ratio is differentiated according to several socio-economic criteria. The general principle consists of setting a maximum limit of 80% for the LTV report for any loan, including those intended for rental investment (buy to let). However, the CdRS recommended that the CSSF allow lending institutions to derogate from this principle by setting specific limits for first-time buyers as well as for other buyers of a main residence.
The CdRS assured that lending institutions may continue to grant loans to first-time buyers covering up to the full value of the property, without, however, going beyond an LTV ratio of 100%, when this does not compromise or their own creditworthiness or that of borrowers. A maximum limit of 90% of the LTV is established for other buyers of a main residence, namely those who already own their main residence and wish to acquire a new one. This limit may be increased by the lending institution under certain conditions to 100%.
The recommendation issued by the CdRS is also in line with the measures presented in the framework of the 2021 draft budget to thwart real estate speculation, particularly the reduction of the accelerated depreciation rate and the introduction of a real estate levy for specialised investment funds investing in the real estate sector in Luxembourg.
In order to prevent the avoidance of the limits provided for by resorting to lending institutions in neighbouring countries, the CdRS recommended that the CSSF ask the competent national authorities of the other Member States to recognise the limits provided for by said recommendation. This reciprocity of the measure by neighbouring countries aims to avoid a distortion of the credit market and / or the installation of unfair competition on the part of actors external to the domestic economy.
The CdRS will continue to monitor developments in the residential real estate market in Luxembourg and compliance with best credit granting practices by lending institutions.
