A positive outlook on interest rate cuts in 2025
Rudolphe ABEN
At the beginning of 2025, the variable effective interest rate in Luxembourg is averaging 4.22%, while the fixed rates are 3.29%, 3.37%, and 3.74% for durations of one to five years, five to ten years, and over ten years, respectively. The European Central Bank (ECB) plans to continue lowering its rates starting in the first quarter of 2025, with a 50 basis point reduction expected, or 0.5%. Although the ECB's main interest rate remains lower than the market rates, it is reasonable to expect a similar reduction in market rates.
If this cut materializes, it would represent a significant turning point, as rates would drop below 3% for the first time since 2023. This shift could have a major impact on the real estate market. Many potential buyers have postponed their acquisition projects due to high interest rates. If these candidates reactivate their plans, it could revive the real estate market dynamics.
The impact of rate cuts on the real estate market
The price correction observed in the Luxembourg real estate market over the past few months opens up new and attractive prospects for future homeowners. This period could indeed be an ideal opportunity to invest in one's dream home, especially if interest rates continue their downward trend. The stabilization of interest rates at lower levels would make homeownership more accessible to a greater number of buyers, even though inflation has already impacted purchasing power.
Although inflation has had a negative effect on residents' purchasing power, a slowdown seems to be on the horizon. This positive shift has allowed the ECB to confirm the continuation of its rate-cutting policy, which could further stimulate economic activity.
Economic outlook for 2025
The economic outlook for 2025 appears optimistic. The ECB is expected to continue its cycle of reducing the main interest rates. The market even anticipates that the fixed rate, currently at 3.29%, could fall to 2.29% by the end of 2025. This forecast is already factored into the projections influencing the 10-year rate at the beginning of 2025. However, for this trend to continue, negative economic factors may prompt the ECB to adopt an even more accommodative policy.
A key factor in determining the long-term rate equilibrium will be the ECB's stance on the neutral rate, an essential data point for the market. According to recent statements from the ECB, the neutral rate range could vary between 1.75% and 2.5% according to C. Lagarde, and between 2% and 3% according to I. Schnabel. In summary, it is likely that the influence of the ECB’s rates on long-term rates will be less pronounced in 2025 compared to previous years.
Opportunities ahead in 2025
In a context where inflation seems to be slowing down and where the ECB continues its rate-cutting cycle, 2025 could offer attractive opportunities for both investors and property buyers. If interest rates continue to fall, this could lead to a significant rebound in the real estate market. Potential buyers would then have the opportunity to pursue their real estate projects under more favorable conditions. As a result, the economic outlook for 2025 remains positive, with a return to significantly lower rates expected to stimulate both consumption and investment.