Already well before this particular period, but even more today, some people are putting their project on hold while waiting for a drop in real estate prices. Is this a good calculation? As always, it depends on which angle the situation is analyzed.
The first thing to consider is the fall in real estate prices. If the trend is reversing, what are the reasons?
In recent years, the growth of the Luxembourg real estate market has far exceeded the growth in wages.
In addition, the current geopolitical situation is causing significant inflation. To fight against this inflation, the central banks are increasing credit rates.
The thread is broken, a good part of the potential buyers can no longer obtain a sufficient budget from the banks to buy a property. As a result, real demand is less important and theoretically, the market should adapt.
Great, then, it was a good calculation to wait, the prices will go down !
Not so fast, if we do see housing prices falling (time will tell), will this correction offset rising rates ?
Take the simple example of a young couple with a comfortable monthly income of €8,000 net. They have a contribution of 100,000€, and want to buy a property at 1,000,000€ all fees included. To do this, they will borrow €900,000 at a fixed rate over 30 years. Considering that the bank accepts a debt ratio of 40%, their maximum monthly payment will therefore be 3200€.
In December 2021, they could have obtained a loan at a rate of 1.5%. The monthly payment would have been €3,102 and, including interest, after 30 years, their property would have cost them €1,216,602.
Today, with a rate of 4%, the monthly payment is €4,259 (+37%). The bank will hardly agree to follow, even if, in the meantime, their net income has increased to €8,500 thanks to the COLA. In 2052, at the end of the loan, they will have paid €1,633,497 to acquire their property.
With the current rate of 4% to return to a monthly payment of €3,102 in 30 years, the initial purchase cost of €1,000,000 will have to drop to €755,400, i.e. almost 25%. Will this happen ? What if rates go up again ?
Was it finally a good idea to wait ?
What solutions for our young couple ?
It is the credit specialists who will be able to give the best advice. Among the solutions to reduce the monthly payment: spread the loan over a longer period, take part in a variable rate, etc. In all cases, you will have to make sure you can renegotiate the rate in case it drops again in the years to come.
In conclusion, if you have a real estate project, if the bank follows you, go for it, now is your time. No one can tell you how things will be in 10 years. Who would have predicted the current situation a year ago ?
A real estate purchase is not just about money. This is where you will spend most of your time.
From a financial point of view, by renting, you lose monthly rent. When you repay a loan for your purchase, you are capitalizing for yourself.
Also, in terms of monthly payment, if today your loan represents 40% of your income, over the years, with COLAs and promotions, this quota should reduce (as long as you limit the risk linked to the variable rate loan).
What if prices go down? If you stay in the same place, it doesn't matter. If you have to resell, yes, you may resell for less, but you could also buy for less.
The only way not to have to say “I should have” and harbor regrets is to get started !
8 Nov 22
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