If the rise in house prices was due to monetary policy, the price development should be similar everywhere, which is not the case, according to the Governor of the Luxembourg Central Bank.
Low interest rates – or the accommodating monetary policy of the European Central Bank – are not the main reason for the increase in house prices in Luxembourg, Gaston Reinesch, the Governor of the Luxembourg Central Bank, argues in a post on his blog. According to Reinesch, this is proven by the fact that the over- or undervaluation of real estate in all eurozone countries varies greatly and because in Luxembourg prices already rose before the accommodating monetary policy.
The statistics do indeed show that house prices have risen the most in recent years in Luxembourg compared to other eurozone countries. In addition, the overvaluation of real estate in the Grand Duchy is much higher than in other countries and in some countries real estate is even undervalued. The high property prices in the Grand Duchy have also led to Luxembourg households taking on more debt with home loans than households in other countries.
Reinesch argues that if the rise in house prices was due to monetary policy, the price development should be similar everywhere, which is clearly not the case. The current “cheap money” policy of the European Central Bank would indeed amplify the price increase, according to the Governor. However, he recalls that this policy was also necessary to support the economy. This was the case even before the pandemic.
The evolution of real estate prices in Luxembourg is “not sustainable” and “represents a risk, a vulnerability”. According to Reinesch, this situation is due to structural problems and above all to the fact that supply has not kept pace with demand for many years. The Governor of the Central Bank therefore calls for coordinated policy action to increase the supply of building land and housing. Reinesch suggests establishing a “competitive building sector”, but also a different and more efficient spatial planning or taxes on vacant land and housing. In this way, excessive accumulation could be limited, and more housing could be created.