We’ve all noticed that during 2022, inflation was the main topic of conversation at the coffee machine.
And there’s nothing to suggest that it will abate in 2023.
Indeed, concern is focused on gas prices (and therefore, by extension, electricity prices), which may have fallen as a result of a rather mild winter on average, but are set to rise sharply as a result of the forthcoming Russian gas cuts and the upturn in the Chinese economy, which is expected to generate strong demand.
Inflation therefore seems inevitable, and Van Maurits believes that there are strategies to guard against it, with real estate leading the way.
Real estate can help protect you from this phenomenon, by preventing your assets – in other words, the money in your bank accounts – from being consumed by inflation.
To give a simple example, if inflation is 10% in 2023, the same object worth €100 in 2022 will now be worth €110 in 2023. In this example, money that is not invested loses 10% of its value in a single year. It could be argued that there are savings accounts, but these struggle to compensate for inflation because their interest rates are simply too low.
With this in mind, let’s take the concerns about property and show that property can provide a hedge against rising prices.
Relative concern about falling property prices
One of the concerns about buying a property is the possibility of a fall in market prices in the near future, and while this is likely to occur in 2023, it should not be a deciding factor in your property plans. Firstly, as a buyer, coming onto the market in 2023 is not bad news in terms of market prices (we’ll come back shortly to the cost of borrowing and why you should take advantage of borrowing during a period of inflation), because the excesses in the prices advertised for sale will be much more limited (compared with the surge in prices in 2020 and 2021), and you can therefore be sure of buying at a fairer price that is close to the real value of the property in 2023.
Secondly, it is important to bear in mind that this probable fall in prices (as reported by Statec) is primarily relative, and should not be a cause for concern for any long-term property project.
If we look ahead to 2022, we need to put two pieces of data into perspective: on the one hand, there is the fall in the number of transactions (or number of sales) and, on the other, the price of properties sold. The number of sales has fallen sharply! In the third half of the year, we are talking about -36% for VEFAs (the new-build market), -17% for flats, and -12.6% for houses.
You can see above the graph published by the Observatoire de l’Habitat for flats and the fall in the number of transactions. This figure is certainly interesting, but what interests us most is the market price.
And here, what is falling is not the average sale price, but the percentage increase in these sale prices. In other words, prices have risen less than in 2020 and 2021, but they have risen all the same! The figures are as follows: +8.3% for existing flats, +7.9% for existing houses, and +18.3% for flats under construction or VEFA.
This logic is not unique to Luxembourg. If we compare it to the famous American property market (which, depending on the locality, is also under pressure due to a lack of construction, and some experts have warned of a property bubble, while property stocks (or the number of buildings) are unable to satisfy buyer demand), there will be a 38% fall in sales of existing properties in 2022, and we are also seeing property loans at over 7% over 30 years. Despite these figures, prices on the market rose by 3.5% year-on-year in June (however, volatility remains fairly high, with prices peaking in June and then falling by 11%). In fact, prices are fluctuating, but the market trend remains upwards, particularly if our benchmark is the long term.
Back on our side of the Atlantic, the 18.3% rise in new-build sales (VEFA) in Luxembourg is questionable, while the number of sales is down by 36%. In fact, this is partly due to changes in the clauses of developers’ contracts. Before the energy crisis, rising wages and shortages of building materials, clauses were included to ensure that the purchase price would rise in line with these costs (with VEFA, people generally buy before the building work has been completed, so the longer it takes for the property to be delivered, the higher the costs for developers). Now, developers have partly withdrawn these clauses in order to reassure buyers, but in exchange, the price indicated in the contract compensates for the absence of a clause and is therefore much higher.
This figure of -36% also puts the fall in prices into perspective. In fact, developers are no longer able to deliver as many projects as in previous years.
Firstly, there are delays because of shortages of materials, but also a drop in the number of projects because funding is no longer as accommodating as we mentioned in our previous blog. And this will have a major impact, not only on prices for 2023, but particularly for the year after, with the figures for 2024 likely to be alarming. If the delays continue, there will be fewer homes built, but just as much demand. New-build prices are bound to rise in 2024 if we follow this line of reasoning.
We can take this opportunity to point out that, in the long term, property remains an attractive investment, as demand for housing in Luxembourg continues to grow. If we go back to what we said, prices have slowed, and there is a likelihood that prices will fall in 2023, but this is precisely an opportunity to acquire a home at a fair price that is not overvalued (we often talk about price corrections, with more or less significant falls to watch out for), while ensuring that, in the long term, the property continues to appreciate in value, as the fundamentals of the property market remain set in stone (durability, use of credit, passing on to heirs, tax advantages of the principal residence, rental yields, etc.). ).
Inflation and bank credit
As we have mentioned several times in our Van Maurits estate agency blogs, what is likely to depress the market in 2023 is the rise in interest rates, which will block a number of buyers from entering the market.
We’ve just mentioned the opportunities that will present themselves to buyers in 2023, and there’s no doubt that access to credit can be a brake. However, inflation is also the best way of reducing the cost of borrowing.
If you borrow at a fixed rate, the rate is certainly high, but the more inflation there is, the less the loan will cost you. This is because the amount you borrow and have to repay is fixed, and remains the same throughout the term of your loan.
However, if inflation continues, depending on the term of your loan, this amount will no longer have the same importance in the future. The amount is not indexed to inflation, and does not follow price rises, whereas on the contrary, the value of the property does follow inflation, and in the long term, increases in value. Rather than keeping cash in a bank account, using this money as a down payment on a mortgage can therefore be a very wise choice.
Rents and property
Finally, inflation and rents are linked. If inflation rises, rents will more or less follow. So if you buy a property to rent out, you are securing an income to protect yourself against inflation. On the other hand, if you are buying a home as your principal residence, you will be repaying your loan, which as we have said does not keep pace with inflation if it is at a fixed rate, and avoiding paying rent, which is index-linked.
So we mustn’t underestimate the advantages of property in a period of inflation such as the one we are currently experiencing, and put the likely fall in prices into perspective, which can only make way for great buying opportunities.
An article by Van Maurits Immobilière