Will real estate prices finally stabilize in 2025 in Luxembourg?

Luxembourg, although small, has a real estate market that, while more modest in size than those of its neighboring countries, has always generated significant interest. A few years ago, the supply of properties for sale was extremely limited, and properties sold quickly, despite often overestimated prices. This phenomenon is typical of seller's markets, where demand is exceptionally high and access to credit remains relatively easy. However, in 2023, the dynamic changed. Due to the rise in interest rates, the market shifted towards a buyer's market: demand dropped dramatically, while supply, on the other hand, increased. For sale signs remained visible on facades for much longer, and transactions became rarer. So, can we expect a paradigm shift in 2025?

Indeed, several factors seem to be aligning to allow the market to recover, provided it follows its natural development cycle. If we consider that the market experienced a phase of decline between 2023 and 2024, it should now enter its phase of rebalancing before moving into a recovery phase. Our on-the-ground experience and theoretical analysis confirm that we may be on the cusp of the last price adjustments, with the rebalancing phase already having begun in mid-2024. This phase could continue its cycle in 2025, eventually transforming into a recovery phase by the end of the year. But what drives this optimism?

First, interest rates are expected to continue decreasing throughout the year. This drop in rates could allow households to have a better purchasing power for acquiring real estate. Additionally, the prices of existing properties have fallen sufficiently, increasing the chances of finding properties at more accessible prices.

Let’s take the example of an apartment in the city, valued at 1 million euros at the peak. By borrowing 1 million euros at an interest rate of 1.2%, with no down payment, the buyer would have to repay 3,340 euros per month over 30 years. If this same property has lost 20% of its value and the buyer now needs to borrow 800,000 euros instead of 1 million, with the repayment period remaining the same at a rate of 3%, the monthly payments would now be 3,380 euros. Thus, even though the property’s value has decreased, the monthly payment remains nearly identical, meaning that the market has reached an equilibrium point. On average, the decline in real estate prices in Luxembourg is about 20%.

For this reason, we believe that 2025 will be the year when equilibrium is restored, followed by a rapid recovery. Of course, this scenario relies on one crucial condition: that interest rates continue to fall and stabilize by the end of the year around 2.5%. As for negative scenarios, two possibilities remain. The first involves a further sharp drop in rates, down to 1.5%, which would cause prices to rise quickly and prevent the market from following its normal development cycle. Conversely, if rates are increased again after a decrease, a new price drop would be needed to find a new equilibrium. This scenario could have disastrous consequences for the real estate market, potentially leading to a sharp decline in its value. Nevertheless, we remain optimistic and estimate that the market recovery will occur between 2025 and 2026.

P.S. In this article, we focus solely on existing real estate, with the new real estate market being a topic we will address in a separate article.