Understanding Real Estate Price Changes and the Impact of Mortgage Rates
Real estate loan rates fluctuate, sometimes going up or down. However, what remains relatively stable is the disposable income required to obtain credit. This context directly influences the affordability of property ownership and, consequently, the evolution of real estate prices.
A Mathematical Relationship Between Prices and Rates
Real estate prices are largely a mathematical reflection of interest rates. This is especially true in a market where people often push their borrowing capacity to the limit (assuming constant lending conditions).
As the graph shows, between a rate of 1.5% and 3.5%, financing capacity decreases by approximately 30%. It is this variability that explains the sharp price correction we have experienced.
The second-hand and new-build markets: two different dynamics
The second-hand market has now adapted, and sales volumes have returned to pre-crisis levels. However, for new-build properties, prices have not fallen sufficiently, and selling properties remains difficult.
A new parameter: independent valuation committees in banks
An additional factor complicates this simple logic: European legislation, which now requires banks to use independent property valuation committees. Even if the buyer has the borrowing capacity, if the estimated value of the property exceeds the amount of the preliminary sale agreement/reservation contract, the bank will not comply or will offer strict/unfavorable terms.
Who really determines prices?
Today, in Luxembourg, the question remains: who really determines real estate prices? Is it the market, the sellers, the buyers, or even the bank appraisers?
Written on 16/06/2025
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