Will real estate prices finally stabilize in Luxembourg in 2025?

Luxembourg, although small, possesses a real estate market that, despite being more modest in size than those of its neighbors, has always attracted significant interest. Just a few years ago, the supply of properties for sale was extremely limited, and properties sold at great speed, despite often overvalued prices. This phenomenon is typical of seller's markets, where demand is particularly strong and access to credit remains relatively easy. However, in 2023, the dynamics changed. Due to rising interest rates, the market transitioned into a buyer's market: demand dropped drastically, while supply increased. Real estate signs stayed visible on building facades for longer, and transactions became rarer. So, can we expect a paradigm shift in 2025?

Indeed, several factors seem to have come together to allow the market to rebound, provided it follows its natural development cycle. If we consider that the market experienced a phase of decline between 2023 and 2024, it should then enter its rebalancing phase before moving on to a recovery phase. Our analyses, both in the field and theoretical, confirm that we could be on the verge of the final price adjustments. The rebalancing phase seems to have already begun in mid-2024, and it could continue into 2025, before turning into a recovery phase by the end of the year. But what is this optimism based on?

First, interest rates are expected to continue falling throughout the year. This drop in rates could provide households with greater purchasing power when acquiring a property. Furthermore, prices for existing properties have fallen sufficiently, which increases the chances of finding properties at more accessible prices.

Let us take the example of a city apartment whose value had reached 1 million euros at the market's peak. By borrowing 1 million euros at a rate of 1.2%, with no down payment, the buyer had to repay 3,340 euros per month over a period of 30 years. If this same property has lost 20% of its value and the buyer now has to borrow 800,000 euros instead of 1,000,000, and the repayment term remains the same at a rate of 3%, the monthly payments would now be 3,380 euros. Thus, although the value of the property has decreased, the monthly repayment remains almost identical, which means that the market has reached an equilibrium point. On average, the drop in real estate prices in Luxembourg is around 20%.

It is for this reason that we believe 2025 will be the year equilibrium is restored, and that a rapid recovery will follow. Of course, this scenario relies on an essential condition: that interest rates continue to fall and stabilize around 2.5% by the end of the year. As for negative scenarios, two possibilities remain. The first would involve an even sharper drop in rates, down to 1.5%, which would lead to a rapid rise in prices and prevent the market from following its normal development cycle. On the other hand, if rates are increased again after a drop, a further price reduction would be necessary to find a new equilibrium. This scenario could have disastrous consequences for the real estate market, risking a sharp drop in its value. Nevertheless, we remain optimistic and estimate that the market recovery will take place between 2025 and 2026.

P.S. In this article, we focus solely on existing properties; the new-build real estate market is a topic we will cover in a separate article.