The Unassuming Economist

From the IMF’s latest report on Luxembourg:

“Demand for housing has exceeded supply for many years. While house prices are in line with fundamentals, they have risen faster than disposable income for years, largely because of structural supply constraints in the context of strong demand, in part reflecting net demographic growth. The dynamics of house prices is also somewhat affected by cyclical factors such as the cost of construction and to some extent the low interest rate environment. Rigid zoning and administrative rules together with land hoarding prevent sufficient construction, while tax incentives and subsidies fuel demand. Reduced affordability has driven up household indebtedness, in particular among younger households.

Risks in the real estate market should continue to be closely monitored, and further actions taken as needed. Recent measures have appropriately built capital buffers in the banking system while discouraging riskier lending. However, household debt is relatively high and limits to debt-service-to-income ratios should be set if house prices continue to outpace disposable incomes. Going forward, the normalization of interest rates could add to the debt service of some households (who borrowed at variable rates) while banks’ margins on their stock of fixed rate mortgages would shrink.

Containing house price pressures and alleviating bottlenecks of housing require a strong effort to expand the stock of housing:

• Excessive red tape in bringing additional land to construction should be pruned, and incentives strengthened. The initiatives of Baulücken for new construction are a step in the right direction;
• Local zoning decisions should be better coordinated with a national spatial development plan and cooperation among municipalities should be encouraged;
• Existing tools to mobilize vacant land and unoccupied dwellings could be strengthened. This includes implementing taxation on vacant lots. In this respect, the initiative of Baulandvertrag goes in the right direction;
• In the PDAT and the municipal implementation, assigning “mixed construction” land in priority to residential real estate would widen the share of land eligible for housing development;
• Tax biases at the municipality level against residential real estate should be reduced further. The reform of the distribution of municipal business taxes among municipalities is a step in the right direction as it reduces incentives favoring commercial over residential real estate zoning decisions. Going forward, policies should increase the share of the ICC redistributed in the equalization fund;
• Increasing property taxes and revising cadastral values would help municipalities increase own resources.

The share of social and affordable housing in total housing could be increased:

• To encourage social housing in the rental segment, public developers in the social sector (FSH, SNCHM, and municipalities) should be gradually steered only towards the development and management of social rentals. This would help clarify management roles and separate more clearly the rental activity from the construction-for-sale business.”