Walking through the suburbs of Luxembourg, the evidence of a decade-long real estate boom is frozen in time.
Once-rural villages have developed into satellite suburbs, the streetscape nearly unrecognisable as farmhouses gave way to geometric, glass-fronted new-build developments in gleaming white and grey.
You can easily get lost. Streets exist that did not before. The pace of the development has been such that Google Maps has not kept up with the change and still shows fields where rows of new-build apartment buildings now stand.
Despite a growing population and high demand for affordable homes, however, many of these apartments are empty.
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The development was accompanied by one of the steepest rises in house prices in Europe over the last decade. Prices more than doubled between 2010 and the third quarter of 2022 in Luxembourg, rising by a striking 140 per cent.
Among European Union countries, only Estonia and Hungary saw steeper rises. In Ireland, house prices rose 50 per cent in the same period, putting us firmly mid-table.
There are signs now that this decade-long trend is coming to an abrupt halt across the Continent.
“The bubble is bursting,” one long-time Luxembourg real estate investor told me. “The new builds are not selling at all. Zero.”
The length of the cheap money era made some people forget how closely tied house prices were to interest rates.
Consider this. In 2021, the average price of a house in and around the Luxembourg capital was €1.4 million. Buyers would typically need to put down a deposit of about 30 per cent.
That would mean taking out a mortgage of €980,000. At the fixed interest rates of 1.4 per cent that were available in 2021, the monthly repayments would have been €3,873.
After a series of hikes by the European Central Bank as it tries to control inflation, however, such mortgages are now being quoted at 4 per cent or more.
This means repayments would now be €5,173, while the overall interest the borrower must pay has surged from €182,050 to €571,840. It all means that the prices of 2021 can no longer be got.
The corresponding correction, however, has yet to materialise. In the last quarter of 2022, house prices fell by 1.4 per cent. The overall picture is that the market has frozen.
At its peak, prices for new property in prime Luxembourg locations tipped €18,000 per square metre. Many developers built, expecting a payout like that and paid for land accordingly. Now, they are holding off on dropping their prices because they don’t want to make a loss.
“Fourteen thousand, eighteen thousand a square metre was normal,” one investor recalls. “Now, you’re lucky to get ten thousand. The new builds, they cannot sell because at ten thousand a square metre they might just break even.”
It all makes for the anachronistic situation in which brand new homes stand empty, advertisements posted in their windows and the debris of recent building work stretching around them.
And simultaneously, young Luxembourgers emigrate from the country – because they can’t afford housing. The issue of access to affordable homes is the primary concern of residents, according to the Politmonitor survey.
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The luxury market has been over-catered for, while what’s missing are affordable homes.
Across Europe, it is clear that the long housing rally has peaked.
In the second half of 2022, Germany saw the biggest six-month fall in house prices in more than 20 years.
In Copenhagen, the number of houses sold in September halved compared to the same month the previous year. It was the lowest number of monthly sales since 2012. In November, the Netherlands saw its biggest quarterly drop in house prices since 2013.
All in all, two thirds of the economies tracked by the OECD saw house prices decline in their most recent quarter.
Denmark saw a drop of 5.9 per cent compared to the previous quarter. In Sweden, the drop was 4.6 per cent. From Latvia to Germany, Italy to the Netherlands, house prices declined.
Ireland’s quarterly fall in house prices was a fractional 0.04 per cent, one of the smallest falls in the EU.
Supply-side issues, like the cost of construction and regulations, and demand-side factors, like income and population growth, all play a role in prices, a recent report by the International Monetary Fund read.
But interest rates are fundamental, it laid out. “A rule of thumb based on cross-country evidence is that every one percentage point increase in real interest rates slows the pace of house price growth by about two percentage points.”