COMMISSION STAFF WORKING DOCUMENT In-depth review for Luxembourg Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2023 European Semester – Spring Package
Date: 2023-05-24
Institutions: European Commission, Secretariat-General
Subjects: European Semester, Luxembourg, banking, economic policy, fiscal policy, housing policy, indebtedness, macroeconomics, property market, real estate credit

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 24.5.2023  SWD(2023) 638 final  COMMISSION STAFF WORKING DOCUMENT In-depth review for Luxembourg Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2023 European Semester – Spring Package {COM(2023) 600 final} - {SWD(2023) 628 final} - {SWD(2023) 629 final} - {SWD(2023) 630 final} - {SWD(2023) 631 final} - {SWD(2023) 632 final} - {SWD(2023) 633 final} - {SWD(2023) 634 final} - {SWD(2023) 635 final} - {SWD(2023) 636 final} - {SWD(2023) 637 final} - {SWD(2023) 639 final} - {SWD(2023) 640 final} - {SWD(2023) 641 final} - {SWD(2023) 642 final} - {SWD(2023) 643 final} - {SWD(2023) 644 final}  
 
 
Luxembourg 

In-Depth Review 2023 

 
 
 
 
 
 
  
 
 
 
 
On  the  basis  of  this  in-depth  review  for  Luxembourg  undertaken  under 
Regulation  (EU)  No  1176/2011  on  the  prevention  and  correction  of 
macroeconomic  imbalances,  the  Commission  has  considered  in  its 
Communication “European Semester – 2023 Spring Package” (COM(2023) 
600 final) that: 

Luxembourg  is  not  found  to  experience  imbalances.  Vulnerabilities  relating  to 
high  house  prices  and  high  household  debt  have  recently  increased  but  overall 
seem  to  be  contained  so  far  and  are  expected  to  ease  over  the  medium  term. 
Strong  population  growth  alongside  increased  mortgage  credit,  incentivised  by 
fiscal  support,  has  pushed  up  demand  for  housing,  while  supply  has  been 
restricted by the limited land available for construction and by land hoarding. The 
widening gap  between housing demand and supply has resulted in strong house 
price increases with growing risks of house prices overvaluation and deteriorating 
affordability. House prices clearly cooled in late 2022, and the number of housing 
transactions declined sharply, as the rise in interest rates have led to a turn in the 
market.  However,  a  sharp  correction  in  house  prices  is  not  expected  as  incomes 
are  holding  up  well  and  the  supply  shortage  is  expected  to  continue.  Household 
debt  is  very  high  in  terms  of  disposable  income  and  has  been  increasing  while 
borrowing  cooled  somewhat  in  late  2022.  Households’  financial  assets  are  also 
substantial,  indebtedness  increases  towards  the  higher  levels  of  income  and 
wealth, and the banking sector is sound, which overall mitigates macro-financial 
risks.  Additional  policy  efforts,  including  by  stepping  up  and  prioritising  the 
adoption  and  implementation  of  recent  measures,  including  recurrent  taxes  to 
increase the supply of buildable land, combined with the ongoing reform of land-
use planning, could help to boost housing supply, including through the supply of 
affordable  and  social  housing  targeted  to  those  most  in  need.  The  efficiency  of 
the  rental  market  could  be  improved  too.  In  addition,  reducing  the  mortgage 
interest deductibility, which was recently significantly increased, would reduce the 
fiscal incentives to borrow which supports high house prices. 

 
 
 
 
 
 
 
 
 
 
 
 
CONTENTS 

1.  Introduction 

2.  Assessment of macroeconomic vulnerabilities 

LIST OF TABLES 

Table 2.1: 
Table 2.2: 
Table 2.3: 
Table 2.4: 

Evolution of maximum mortgage interest deductible from taxable income 
Impact of different MITR policies in households borrowing capacity 
Selected economic and financial indicators (Part 1), Luxembourg 
Selected economic and financial indicators (Part 2), Luxembourg 

LIST OF GRAPHS 

Graph 2.1:  House price, credit, population, and employment 

Graph 2.2:  Price-to-income ratio 

Graph 2.3:  House price, rent and income (nominal terms) in Luxembourg and household debt-to-income ratio in EU Member 

States 

Graph 2.4:  Share of owners and foregone tax revenue 

Graph 2.5:  Nominal interest rate 

Graph 2.6:  Selected graphs, Luxembourg 

Graph 2.7:  Components of gross fixed capital formation deflator growth and consumer price inflation 

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18 

 
 
 
 
 
 
 
 
 
1. 

INTRODUCTION 

In  2022,  over  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic 
Imbalance Procedure (MIP), Luxembourg was not subject to an in-depth review to assess 
its vulnerabilities. (1) The 2023 Alert Mechanism Report published in November 2022 concluded 
that  an  in-depth  review  (IDR)  should  be  undertaken  for  Luxembourg  this  year,  with  a  view  to 
examine  newly  emerging  vulnerabilities  and  their  implications. (2)  The  AMR  concluded  that  in 
Luxembourg, concerns related to house price developments and high household debt had increased. 
Nominal house price growth was among the highest in the EU, raising concerns about overvaluation 
and high household debt. Household debt as a percentage of household gross disposable income 
was declining but remained very high. The banking sector was stable but faced some risks. Some 
competitiveness concerns may have been emerging, amid continued unit labour cost growth. 

Luxembourg’s  GDP  growth  was  above  the  EU  average  in  recent  years  driven  by  solid 
domestic  demand  and net  exports.  The  economy  fared  relatively  well  during  the  COVID-crisis 
mainly  due  to  the  large  share  of  services  in  the  economy  and  significant  government  support. 
Following a strong recovery from the pandemic in 2021, with GDP growth of 5.1%, Luxembourg’s 
economic  activity  slowed  to  1.5%  in  2022.  This  decline  was  mainly  due  to  lower  private 
consumption  and  a  fall  in  investments  following  high  inflation,  tighter  financing  conditions  and 
geopolitical uncertainty. Going forward, real GDP growth is projected to be at 1.6% in 2023, before 
recovering  to  2.4%  in  2024,  mainly  due  to  an  improvement  in  net  exports  and  investments.  (3)  
Following  the  headline inflation  peak  of  8.2% in  2022,  on  the  back  of  elevated  energy  and  food 
prices, inflation is projected to decrease significantly to 3.2% in 2023. This can be explained by the 
projected  decrease  in  energy  prices  in  combination  with  the  fiscal  support  measures  to  limit 
inflation that were extended until end 2024. A further decline to 2.6% is forecast for 2024, due to 
a fall in all inflation components. Core inflation is expected to remain high in 2023 mainly driven by 
the increase in compensation of employees, before declining in 2024.  

This  in-depth  review  presents  the  main  findings  of  the  assessment  of  macroeconomic 
vulnerabilities for Luxembourg. The assessment is backed by a thematic section on the housing 
market.  Vulnerabilities  related  to  housing  in  Luxembourg  are  also  discussed  in  a  horizontal 
thematic note that was recently published. (4) The MIP assessment matrix is published in the 2023 
Country Report for Luxembourg. (5) 

(1)  European Commission (2022), European Semester Spring Package 2022, COM(2022) 600 final. 

(2)  European Commission (2022), Alert Mechanism Report 2023, COM (2022) 381 final. 

(3)  European Commission (2023), European Economic Forecast: Spring 2023, Institutional Paper 200. 

(4)  European Commission (2023), Housing Market Developments: Thematic Note to Support In-Depth Reviews, European 

Economy: Institutional Papers, 197. 

(5)  European Commission (2023), Country Report Luxembourg 2023, SWD(2023) 616 final. 

4 

 
 
 
                                                 
 
2.  ASSESSMENT OF MACROECONOMIC 
VULNERABILITIES 

Gravity, evolution and prospects  

On  5  April  2023  the  Commission  presented  a  horizontal  thematic  note  on  housing 
market  developments,  including  Luxembourg. 
in 
Luxembourg have more than doubled in nominal terms over the last decade, with a large share of 
this increase taking place over the last four years. As a result, the price-to-income ratio experienced 
one  of  the  highest  increases  in  the  EU,  reflecting  affordability  issues.  Strong  economic  and 
demographic  dynamics  have  driven  housing  demand,  while  supply  has  persistently  lagged. 
However, a potential correction of house prices, following a significant increase in interest rates and 
an increase in unemployment, and considering the high household mortgage debt, raises financial 
stability concerns for the domestically oriented banks, which hold roughly 90% of mortgage debt.  

It  demonstrated  that  house  prices 

Over  the  last  decade,  house  prices  in  Luxembourg  have  increased  markedly.  Between 
2012 and 2022, house prices have increased by 118% in nominal terms (44% in the euro area), 
with  half  of  this  increase taking  place  over  the  last  four  years.  The  continued  strong  increase  of 
house prices in 2021, led the ESRB to conclude in February 2022 that real-estate related risks were 
high  and  that  the  measures  in  place  were  only  partially  appropriate  and  partially  sufficient  and 
argued  for  additional  income-based  measures,  such  as  debt-to-income  limits. (6)  In  2022,  a 
slowdown in house price growth was observed following the tightening of financing conditions. The 
y-o-y growth in 2022 still amounted to 9.6% (13.9% in 2021 and 14.5% in 2020), but the fourth 
quarter saw a decline in prices versus the previous quarter (-1.4%). Also the number of transactions 
and the mortgage volumes showed a decrease in line with the slowdown of the housing market. In 
2022, house prices in Luxembourg have remained less sensitive to changes in the economic and 
financial environment, compared to other Member States. 

Statistical  indicators  suggest  that  the  long-term  price  increases  have  led  to  an 
overvaluation  in  the  Luxembourg  housing  market.  The  Commission  estimates  the 
overvaluation  gap  in  Luxembourg  at  63%  in  2022. (7)  This  is  an  unweighted  average  of  three 
indicators in the range of 10% to 97%, which shows the wide variety of these estimates, although 
all point to an overvaluation. (8) 

House  prices  have  increased  faster  than  income,  raising  affordability  concerns.  The 
affordability issue is evidenced by the growth divergence between households’ income and house 
prices, especially since 2015; real disposable income per head grew by 8%, while real house prices 
increased  by  63%  between  2015  and  2022.  Therefore,  the  price  to  income  ratio  has  risen  by 
around  50%  since  2015,  one  of  the  highest  increases  among  the  euro  area  Member  States  in 

(6)  ESRB, Vulnerabilities in the residential real estate sectors of the EEA countries February 2022. 

(7)  The Commission overvaluation gap is the unweighted average of the price-to-income (81%), price-to-rent (97%) and 

model valuation gaps (10%). The latter is an econometric model based on fundamental drivers; population, interest rates 
and housing supply (see also table 2.4). 

(8)  BCL reported in their Financial Stability report 2022 an 26% overvaluation in first trimester 2022, the ECB reports a 54% 

average overvaluation gap end 2022. 

5 

 
                                                 
 
2021. (9)  The  affordability  concern  is  aggravated  by  the  fact  that  only  2%  of  the  total  housing 
stock is rented at social and affordable prices. (10)  

Graph 2.1: House price, credit, population, and employment 

2. 

Assessment of macroeconomic vulnerabilities 

Source: Eurostat, ECB and European Commission services 

The  strong  economic  growth  has  led  to  a  high  increase  in  employment  and  disposable 
income, also stimulating demand for housing and mortgage credit.  An uneven acceleration 
of demand across income quartiles was observed in recent years. It was especially strong among 
the higher income levels, while demand from the bottom quartiles decreased in relative terms. Four 
packages  of  high  energy  price  support  measures  have  been  adopted  by  the  government  since 
2021, supporting income and employment until the end of 2024. 

Demand was further stimulated by a higher participation of (foreign) investors attracted 
by the high house price increases. The higher participation from investors, notably in the market 
segment of newly built apartments, also contributed to pushing up house prices. Over 40% of this 
type of dwellings were purchased by investors between 2015 and 2021 (11), pointing to a demand 
shift towards buy-to-let investments. The fall in real (12) rental yields did not discourage buy-to-let 
investors.  This  implies  positive  expectations  on  tax  advantages  and  capital  gains. (13)  Investors’ 
participation seems to have started to decline in 2021 following the 80% loan-to-value (LTV)-limit 
and  more  strongly  in  2022  following  the  rise  in  interest  rates.  Despite  the  increases,  buy-to-let 
housing remains limited in the housing market. (14)  

The strong increase in mortgage credit has fuelled the large house price increases, and 
fiscal support has contributed to this. The growth in employment and income combined with 
very low financing costs and strong fiscal support have spurred mortgage growth since the 2008-
2009  financial  crisis.  Borrowers  benefited  from  historically  low  mortgage  rates,  which  increased 
their  capacity  to  borrow.  The  large  fiscal  support  to  home  ownership  partly  explained  the  higher 
credit  growth  in  recent  years,  compared  to  other  Member  States  (see  also  Box  1).  The  2017  tax 

(9)  ESRB, 2022. 

(10)  Note-30-en-bref.pdf (public.lu). 

(11)  Ministry of housing, 2022. 

(12)  In January 2021, differentiate loan-to-value limits were enforced: 100% for first time buyers, 90% for primary residents 

and 80% buy-to-let and other investors.   

(13)  Rental income is also capped at 5 percent of the purchase value of the dwelling, but tax deductions stimulate the return on 

investment during the first five years after purchase. Rents can be revalued when tenants change. 

(14)  Eurostat House or flat – owning or renting (europa.eu). 

6 

-50510152025-5051015202504Q405Q406Q407Q408Q409Q410Q411Q412Q413Q414Q415Q416Q417Q418Q419Q420Q421Q422Q4Rate of change y-o-y (%)Rate of change y-o-y (%)a)Real house price and mortgage growthMFI loans for house purchase (y-o-y growth rate)Nominal House Price Index (y-o-y growth rate), right axis10015020025030035040095979901030507091113151719211995 = 100b) Evolution of house prices, population and employmentPopulationEmployment in resident production unitsDeflated house price index        
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

reform abolished the taxable rental value and increased mortgage interest deduction for the main 
residence  and  introduced  an 
increased  threshold  for  deducting  home  purchase  savings 
contributions.  In  2015,  the  ceiling  for  the  VAT  super  reduced  rate  on  newly  constructed  home, 
previously linked to the value of the house, was replaced by a ceiling on deductibility. In 2017, the 
temporary budgetary compensation tax of 0.5 percent was abolished, and several tax credits have 
been  introduced.  Together,  these  various  fiscal measures  represent  large  support. (15)  This makes 
Luxembourg  as  one  of  the  highest  spenders  on  housing  subsidies  in  advanced  economies.  The 
borrowing capacity of most households have decrease due to higher mortgage rates in 2022 and a 
deterioration of real incomes due to elevated inflation. This is slowing  down demand and a sharp 
decline  in  the  growth  rate  of  mortgages  has  been  observed. (16)  In  the  last  high  energy  price 
support package, the government took two fiscal measures to support mortgage demand (see also 
policy section). 

Graph 2.2: Price-to-income ratio 

Source: Eurostat and European Commission services 

Strong demographic dynamics have driven up the housing demand, with housing supply 
persistently lagging demand. Between 2010 and 2021, the population increased by around 30% 
(versus  5%  in  the  euro  area),  more  than  7,000  households  per  year (17).  Meanwhile,  the  pace  of 
production  of  new  dwellings  was  below  4,000  units  per  year  (Graph  2.6,  panel  b),  significantly 
below estimated demand between 6,200 and 8,000 (18).  This has resulted in a structural  housing 
shortage  and  increased  pressure  on  house  prices.  This  has  been  partly  mitigated  by  the  cross-
border  housing  market,  with  an  increasing  number  of  non-resident  workers  commuting  across 
borders every day, mainly from Germany, France and Belgium. Commuting workers reached 204.6 
thousand  in  2021,  around  42%  of  domestic  employment.  This  creates  a  large  pool  of  pending 
demand for housing in Luxembourg. The low supply of housing is also due to the high concentration 

(15)  Estimated at 2.5% of GDP by Girshina, A. et al. 2022. 

(16)  BCL statistic tables (11.7 and 11.9). 

(17)  Furthermore, population is playing a critical role in the county’s broad economic performance, and in particular in the 

sustainability of public finances over the long term. In this regard, Luxembourg has been repeatedly addressed Country 
Specific Recommendations to ensure the sustainability of its public finances. This is part of the macroeconomic and 
budgetary surveillance carried out by the Commission in the framework of the European Semester (see Council 
Recommendation, 2022, and European Commission, 2021, for a detailed presentation of estimates). 

(18)  Estimated housing demand range between 6,200 and 8,000 housing units per year, from 2018 to 2030, required to 

achieve a GDP growth of 3% on average per year, depending on the assumptions on the share of cross-border workers 
STATEC, 2019.  

7 

5075100125150LUNLPTCZATHUDEIEESSISKDKLVEEFRSELTBEELMTHRPLFIITBGCYRO2015 = 1002014-2020212022       
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

of  land (19)  which  allows  landowners  to  adjust  markups  and  reap  a  larger  share  of  the  fiscal 
support to homeowners. (20) 

The stock of social housing is one of the lowest in the EU. The limited stock partly reflects 
the  preference  of  public  providers  who  used  to  allocate  about  one  third  of  constructed  units  to 
renting and two thirds for sale and the past practice of allowing re-sale of subsidised housing on 
the non-subsidised housing market. 

Construction activity has slowdown in 2022, driven by the rise in interest rates, but the 
impact  on  GDP  is  expected  to  be  small.  Construction  activity  started  to  slow  down  in  2021, 
following  disruptions  in  production  chains  and  higher  inflation,  which  significantly  raised 
construction costs. With the rise in interest rates housing demand from households and buy-to-let 
investors (21) weakened, slowing down supply and reducing construction activity. The lower activity 
in residential construction is expected to have a small impact on the country’s aggregate economic 
growth, since its weight is less than 5% in GDP. (22) 

Existing rental prices have increased much slower than consumer prices, in contrast with 
advertised rents that have even accelerated in the short term.  Rental prices increased by 
1.3%  on  average per year  from  2010  to 2022,  which  was  lower than  growth  of  the  harmonised 
consumer  prices,  despite  a  small  acceleration  in  2022  to  2%.  Existing  rents  are  not  regularly 
adjusted for inflation, partly because automatic indexations are not enforceable in lease contracts 
and need to be negotiated between the owner and the tenant. New rents are significantly higher 
than existing ones. Advertised (23) rental prices increased by around 3%, on average per year, in line 
with  inflation,  and  accelerated  significantly,  (by  8.0%  in  Q4-2022  year-on-year)  in  line  with  the 
harmonised  index  of  consumer  prices  (8.4%  in  Q4-2022  year-on-year).  This  increase  might  be 
explained by further demand shifting from home ownership towards renting, a trend also observed 
in previous years (between 2017 and 2021 the share of tenants increased by 3.6pps to 28.9%). (24) 
This  could  be  due  to  increased  affordability  problem,  which  is  likely  to  be  aggravated  by  the 
introduction of loan-to-value limits in 2021 and the rise in interest rates in 2022.  

The rise in interest rates has led to a turn in the housing market but a sharp correction 
in house prices is not expected. While the financial cycle has entered a downward trend a sharp 
housing  price  drop  is  not  expected.  The  impact  on  prices  tends  to  be  dampened  by  supply 
adjustments (25),  therefore  price  volatility  from  a  cyclical  downturn  is  expected  to  be  weaker  in 
Luxembourg,  compared  with  other  Member  States.  Although  house  prices  declined  q-o-q  in 
Q4-2022, for the full  year a still  high price growth of 9.6% was observed. Considering the sharp 
decline in the number of transactions and mortgage credit amounts, such a steady growth in house 
prices  appears  remarkable.  It  also  results  from  the  practice  of  sales  retention  by  developers  to 

(19)  Despite the relative abundance of constructible land in Luxembourg, land supply appears to be a key limiting factor for 
housing supply, supporting house price inflation. The price of constructible land, which accounts for 20%-40% of the 
housing sales value, increased by 136.5% between 2010 and 2021, higher than house prices. 

(20)  Girshina, A. et al. 2022. 

(21)  Since rising interest rates makes real estate investment more expensive, and at the same time alternative investments 

become relatively more profitable. 

(22)  According to Luxembourg Annual National Accounts, Gross fixed capital formation dwellings and GDP (EUROSTAT). 

(23)  This indicator is published by STATEC based on data collected from estate retailers and provides a gauge of current prices 

for households accessing the rental market, as opposed to the standard indicator of rental prices, which includes all existing 
rents. Figures need to be taken with care though, since they are not adjusted for the characteristics of the dwellings 
announced and may diverge from the rent eventually agreed between owner and tenant. 

(24)  Eurostat: Statistics | Eurostat (europa.eu). 

(25)  In this line, house sellers respond swiftly, adjusting activity, to dampen negative short-term price dynamics. 

8 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

sustain price levels (26), in expectation of demand to recover momentum. (27) The labour market is 
expected to remain resilient with solid domestic employment growth of 2.4% in 2023 and 2.3% in 
2024  and  a  low  level  of  unemployment  (4.8%  in  2023  and  5.0%  in  2024)  (Commission  Spring 
2023  forecast).  Therefore,  disposable  income,  supported  by  the  automatic  wage  indexation,  is 
expected to continue to grow. After the ’absorption’ of the interest rate shock, the structural higher 
demand versus supply is expected to continue to drive house price increases. 

Graph 2.3: House price, rent and income (nominal terms) in Luxembourg and household debt-to-
income ratio in EU Member States 

Source: Eurostat and European Commission services 

In recent years, concerns have increased with regard to the housing market because of 
the  high  household  debt,  especially  in  terms  of  disposable  income.  Household  debt  as 
percentage of disposable income continued trending upward and is substantially higher compared 
to  other  Member  States.  At  an  aggregate  level,  household  debt  reached  180%  of  disposable 
income in 2022, 61% above its long-term average, which is one of the highest deviations from its 
historical  average  among  the  EU  Member  States.  Household  debt  is  largely  attributable  to  the 
strong growth in residential  real  estate loans, as bank mortgages account for more than 80% of 
household debt (146% of disposable income). A long period of supportive financial conditions and 
fiscal policies have favoured home ownership over tenancy contributing to sustain mortgage credit 
growth.  In  line  with  growth  of  house  prices,  mortgage  credit  increased  steadily  since  2009,  at  a 
stable rate of 5.4% on average in real terms (Graph 2.3). Households require a larger share of their 
income  to  pay  their  mortgages,  which  limits  the  access  to  home  ownership  for  an  increasing 
proportion  of  the  population,  especially  among  lower  income  households,  such  as  starters  and 
young households.   

The risk for the domestic banks is mitigated because a large share of debt is owed by 
wealthy households. Luxembourg’s has a large financial sector but just a few national banks are 
exposed  to  the  housing  market.  Domestic  banks  are  exposed  to  vulnerabilities  related  to  high 
housing price declines and the high household debt. However, a significant share of the financial 
sector is internationally oriented and with a high level of foreign ownership. The activities of foreign 
banks are mainly cross-border intra-company and international  corporate finance and investment 
focused  and  therefore  have  a  limited  interaction  with  domestically  oriented  banks.  Households’ 
financial  assets  are  also  high,  therefore  mortgage  debt  appears  to  be  well  covered  by  the  liquid 
financial  assets  at  an  aggregate  level. Net  financial  assets  compared to  the national  income  are 

(26)  The construction sector is run by a few large companies, which also own land (Observatoire de l'Habitat, 2022 and 2021).  

(27)  STATEC, 2023. 

9 

501001502002500910111213141516171819202122(2010=100)a) Evolution of house prices, rents and household incomeHouse pricesRentIncome050100150200250DKNLSELUFICYBEFRPTMTIEDEESATHRSKELEEITCZPLSIBGLTHUROLV% of gross disposable incomeb) Household debt2014-2020212022      
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

close  to  the  euro  area  aggregate,  at  267%,  and  total  savings  and  deposits,  which  reached 
EUR 54.7 billion in Q3-2021, are above the aggregate stock of debt of EUR 50.9 billion. Moreover, a 
distributional perspective on mortgage affordability and debt-to-income and wealth levels point to 
lower  vulnerabilities  in  the  household  sector  than  the  aggregate  measures  might  suggest.  In 
addition, lower income households hold lower debt, as breakdowns of households by both income 
and wealth show. Among the lower income households there are relatively fewer homeowners and 
more  tenants.  Whereas  the  average  cost  of  mortgage  loans  increased  over  the  period  2020  to 
2022,  it  remains  low,  rising  from  1.32%  to  1.46%,  while  only  5.4%  of  homeowners  with  a 
mortgage had a housing debt burden above 25% of their disposable income, compared with 13.6% 
in  the  EU. (28)  Furthermore,  the  proportion  of  mortgages  at  adjustable  rates  has  significantly 
decreased  recently  and  currently  stands  at  40%,  while  most  of  the  mortgages  granted  in  recent 
years were at fixed rates. (29) Finally, the highly resilient labour market and very low unemployment 
rates, sound public finances and strong social security are important factors supporting borrowers’ 
debt servicing capacity and contributing to the high level of financial stability in Luxembourg. 

Banks’  buffers  appear  sufficient  to  absorb  potential  shocks  stemming  from  the 
residential real estate market and mortgage debt. Nearly 90% of mortgage debt is held by 
five domestically oriented banks (out of around 120 MFIs operating in Luxembourg) and accounts 
on  average  for  around  25%  of  their  total  assets.  The  effects  of  stress  tests  carried  out  by  the 
Central Bank of Luxembourg showed a potential decline in the solvency ratio ranging from 0.8pps 
to  3.1pps,  to  reach  a  ratio  of  15.9%  in  the  worst-case  scenario  of  a  fall  in  residential  property 
prices induced by the estimated default probabilities. (30) The weighted average loan-to-value ratio 
of  the  domestic banks  active  in the  residential  real estate  market,  declined  from  around  78%  to 
76% in 2021, while the weighted average loan service to income ratio of the five domestic banks 
has crept up over the past two years, from 28% in the first half of 2019 to 33% in the second half 
of  2021,  which  is  relatively  low  compared  to  other  Member  States.  Therefore,  the  data  in  2021 
suggests  that  the  introduction  of  additional  capital  measures  and  loan-to-value  limits  had  a 
dampening effect on mortgage loan flows and domestic banks appear to have sufficient capital to 
absorb housing market shocks. 

In general, banks are well capitalised and liquid, and profitability has increased in 2022. 
Financial  risks  for  the  banking  sector  mainly  stem  from  the  impact  of  further  monetary  policy 
tightening  and  the  potential  heightened  volatility  in  financial  markets.  Despite  the  high  level  of 
uncertainty  surrounding  economic  activity,  banks’  balance  sheets  are  sound.  The  rising  key  rates 
weigh on demand for loans, but also support banks’ net interest rate margin, which increased by 
39%  in  2022  and  is  expected  to  increase  also  in  2023. (31)  The  common  equity  tier  one  (CET  1) 
ratio  remains  at  17.6%  well  above  the  legal  threshold,  in  Q2-2022  (at  21.4%  for  domestically 
oriented banks). (32)  The  ESRB  and  BCL  projections  show  that the  credit-to-GDP  gap,  which is  the 
standard measure recommended by the ESRB to calibrate the counter cyclical capital buffer, turned 
negative in 2022 and is expected to remain negative over 2023. (33) Although the level of credit-to-
GDP  is  below  its  long-term  trend,  due  to  the  high  degree  of  uncertainty  surrounding  these 
projections, the National Systemic Risk Board decided to maintain the countercyclical capital buffer 
at the level of 0.5%, in place since January 2021.  

(28)  BCL FSR 2022. 

(29)  BCL, 2022. 

(30)  BCL FSR 2022. 

(31)  STATEC, 2023. 

(32)  Macro charts Consolidated banking statistics for Luxembourg, domestic stand-alone banks. 

(33)  CdRS, 2023. 

10 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

Assessment of MIP relevant policies 

Household  debt  remains  high  in  Luxembourg  and  is  incentivised  by  mortgage  interest 
deductibility  which  was  recently  increased.  The  government  announced  an  increase  of  the 
mortgage interest rate tax deductibility and a higher tax credit, as part of the government support 
measures in Solidariteitpak 3.0. The government has announced a 50% increase of the mortgage 
interest  deductibility  and  an  increase  in  the  tax  credit  from  EUR  20 000  to  EUR  30 000  for 
purchasing  building  land  and  residential  buildings.  Although,  this  measure  is  in  response  to  the 
higher  interest  rates  and  the  currently  observed  slowdown  in  the  housing  market,  its  permanent 
nature will further stimulate demand for housing that is already structurally high (see also Box 1). 
Conversely, Luxembourg implemented LTV-limits in 2021, which should have a dampening effect, 
although the ESRB concluded in 2022 that measures in place were only  partially appropriate and 
partially  sufficient  and  argued  for  additional  income-based  measures,  such  as  debt-to-income 
limits.  

The  tax  system  favours  homeownership  compared  to  other  housing  tenures,  such  as 
renting,  which  contributes  to  strong  housing  demand.  The  favourable  tax  treatment  of 
owner-occupied  housing  is  likely  to  benefit  high-income  households  the  most.  This  is  particularly 
true for the deductibility of mortgage interest, which is generally regressive, because high-income 
households are much more likely to finance their house with mortgage debt. Gradually phasing out 
mortgage  interest  rate  deductibility  would  make  taxation  of  owner-occupied  property  less 
regressive. The introduction of a progressive recurrent tax schedule to the owner and an increase in 
the recurrent taxes on immovable property that is based on regularly updated property values also 
reduce regressivity of tax systems. However, unless cautiously designed, the introduction of higher 
recurrent taxes can have a negative impact on affordability of households with low incomes and 
less liquid assets. 

The  government  has  presented  a  package  of  three  tax  measures  in  order  to  address 
some of the supply side obstructions. The package contains a reform of the current land tax 
(IFON), the introduction of a tax on the mobilisation of land (IMOB) and on the non-occupation of 
dwellings (INOL). The tax measures aim to increase the supply of land and usage of constructable 
land and unoccupied dwellings and therefore is a step in the right direction. However, the package 
still needs to pass the legislative process and is implemented over several years, therefore, it’s too 
early to assess its effectiveness in addressing the supply side vulnerabilities. The government also 
presented  some  new  amendments  regarding  the Baulandvertrag bill  on  9  November  2020.  This 
draft law aims to improve the effectiveness of measures relating to the implementation of urban 
development plans ("PAG") to speed  up the construction process for new housing. In addition, the 
government plans an increase in public investments in housing to support supply, raising them from 
3% of total investments in 2022 (EUR 83mln) to 8% (EUR 313mln) in 2026 according to the multi-
annual budget.  

Luxembourg  does  not  have  a  dynamic  rental  market  and  rent  setting  is  strongly 
regulated. An increase in the share of rental housing could improve the dynamics of the housing 
market.  The  draft  law  on  residential  rental  lease,  tabled  on  31  July  2020  by  the  Luxembourg 
Minister of Housing, is still being debated and no solution before the elections in October 2023 is 
foreseen. The law aims to reduce the ceiling on rents, set a maximum deposit amount as guarantee 
and increase the transparency of the rent setting to get a ‘fairer’ private rental market. Especially 
the  rent  setting  policy  with  the  current  ‘5%  rule’  does  not  seem  to  be  effective  in  increasing 
transparency  nor  limiting  rent  increases.  In  addition,  the  government  aims  to  increase  the 
construction of rentals in the housing stock via both public and private developers. 

11 

2. 

Assessment of macroeconomic vulnerabilities 

The stock of social housing is one of the lowest in the EU. However, efforts to increase the 
share  of  social  rental  housing  are  underway.  The  sale  of  social  housing  has taken  the  form  of a 
long-term  lease,  which  is  welcome  as  it  effectively  captures  the  value  of  developed  land,  which 
remains a property of the public housing providers. However, the provision of social and affordable 
housing  remains  insufficiently  for  low-income  households.  To  overcome  existing  municipal 
resistance  to  densification,  the  Housing  Pact  2.0  targets  were  extended  to  include  additional 
criteria,  such  as  numerical  targets  for  social  housing  construction  for  municipalities. (34)  The 
government plans to increase public investments to support the supply of affordable housing and 
affordable  and  social  rentals,  in  cooperation  with  the  public  promoters  Fonds  de  Logement  and 
Société  Nationale  des Habitations  à  Bon  Marché.  At the  start  of  2022, Luxembourg  announced  a 
reform  of  the  legal  framework  on  housing  to  improve  affordability.  Housing  support  will  be 
reformed by two bills that will replace the current law. The first bill will establish a clear framework 
for  financing  affordable  housing  and  supporting  its  inhabitants.  The  second  bill  will  extend  and 
simplify individual support schemes for housing, both rented and owned in the private market. The 
objective of this reform is to ensure the right to housing and foster social cohesion. It is too early to 
assess the impact of these bills on affordable housing supply at this stage. 

The densification of the existing urban and suburban space in the immediate vicinity of 
transport  network  hubs,  in  particular  railway  stations,  facilitates  the  use  of  public 
transport.  In  that  way,  densification  could  lead  to  shorter  commuting  trips  and  encourage 
alternative  means  of  travel,  which  tends  to  be  more  competitive  with  car  travel  over  short 
distances.  The  measure  for  free  public  transport  was  appropriate  in  this  sense.  The  recent 
sustainable  mobility  strategy  emphasises  both  the  multimodal  and  cross-border  dimension  and 
plans  to  double  the  number  of  park  and  ride  facilities,  including  at  the  borders,  by  2030.  As  the 
main  transportation  flows  also  involve  cross-border  travel,  infrastructure  projects  require 
preparation  with  support  and  participation  of  the  neighbouring  regions  and  close  involvement  of 
border municipalities, public and private providers of rail and road transport. 

(34)  One of the Housing Pact 2.0 objectives is a higher number of affordable housing in each ’plan d’aménagement particulier 
nouveau quartier’ (PAP NQ)”: a certain percentage of the constructed gross area for housing (10% min) is reserved for 
affordable housing. The land on which these houses will be built is transferred to the municipality or the State. In return, the 
building potential reserved for housing is increased by 10% compared to the ‘plan d’aménagement général‘ (PAG). 

12 

 
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

Box 1: Mortgage Interest Tax Relief in Luxembourg 

Taxation has been used in many countries with the objective of subsidising homeownership. One of 
the most common used tax policies is the possibility for homeowners to deduct the interest paid on 
their mortgage from their taxable income, reducing the amount of income tax that they owe. This 
measure is commonly known as Mortgage Interest Deduction (MID) or Mortgage Interest Tax Relief 
(MITR). MITR has been a part of the Luxembourg’s tax code since 1983 and has been updated since 
then.  As  Table  2.1  shows,  the  level  has  increased  over  time,  and  there  have  been  two  recent 
increases in 2017 and 2023. Since the beginning of 2023 interest payments of 3 000 euros per 
person  could  be  deducted  from  taxable  income  by  households  that  have  occupied  their  house  in 
2018 or after, for the first 6 years of occupancy. This represents an increase of 50% of deductible 
interest payments from 2022 and corresponds to a deductible amount of 12 000 euros per annum 
for a family of four. 

Table 2.1: Evolution of maximum mortgage interest deductible from taxable income 

Source: For the legal basis, please follow the link: https://www.legilux.public.lu/eli/etat/leg/rgd/1968/07/12/n2/jo 

The  objective  of  governments  when  they  introduce  the  MITR  is  to  subsidise  home  ownership, 
usually for specific groups, by reducing the burden of interest payments on the mortgage. If supply 
of  housing  is  elastic,  it  could  be  expected  to  increase  in  response  to  the  increased  demand. 
However,  in  the  case  of  inelastic,  or  weakly  elastic  supply,  mortgage  interest  relief  acts  only  or 
primarily  to  increase  demand  and  drives  up  property  prices.  It  then  acts  as  a  transfer  to  home 
sellers, who are able to secure higher prices for the homes they sell. This is particularly the case for 
untargeted measures, which are available to all borrowers, rather than a subset. 

In  addition,  MITR  primarily  benefits  high-income  earners  who  can  afford  to  purchase  expensive 
homes.  This  means  that  lower-income  and  middle-class  families  who  may  struggle  to  afford  a 
home  do  not  benefit  as  much  from  this  deduction  (Andrews,  Dan  and  Aida  Caldera  Sánchez 
(2011)). The evolution of the share of owners with a mortgage (see Graph 2.4 a) in Luxembourg is 
quite  stable  and  also  evidence  that  high-income  families  are  more  likely  to  have  access  to 
mortgages.  MITR in the  case  of Luxembourg is  translated  in  a  significant lower  effective interest 
rate (see Graph 2.5 a), in the case of high-income households, which raises households borrowing 
constraints, driving up prices significantly. Finally, it can lead to a significant loss of revenue for the 
government, as it reduces the amount of income tax that is collected (see Graph 2.4 b and 2.5 b). 

13 

 
 
 
   
 
Graph 2.4: Share of owners and foregone tax revenue 

2. 

Assessment of macroeconomic vulnerabilities 

graph b: OECD Affordable Housing Database, available in https://www.oecd.org/els/family/PH2-2-Tax-relief-for-home-
ownership.pdf (please check also for notes). 
Source: European Commission services 

Graph 2.5: Nominal interest rate 

The value of the mortgage is the estimated as 100% LTV required to acquire a 100m2 dwelling, by back casting the 
2022 price per square meter in 2022 (EUR 8901, source STATEC), max marginal income tax rate of 46.62%, 30 years 
loan, family size equal to 4 persons. It is assumed that the occupancy in the first year of occupancy starts in beginning of 
July, meaning that there are only 6 monthly payments. 
Source: ECB and European Commission services 

For  a  significant  share  of  potential  house  buyers  their  demand  is  determined  by  their  access  to 
credit or borrowing capacity. The borrowing capacity of a household is the loan that a household 
can repay using a share of their monthly income. It increases with income and decreases when the 
interest rate rises. An increase in MITR its equivalent to a decrease in interest rates and therefore it 
increases the borrowing capacity. Table 2.2 presents an illustrative scenario about how the change 
in MITR implemented in 2023 affect the amount households can borrow to by property. It shows 
that the increase in the MITR is equivalent to an increase in the borrowing capacity of 4.4% (see 
Table 2.2). Conversely, a complete elimination of the MITR would translate into a decrease of the 
amount  that  can  be  borrowed  by  11.6%.  These  scenarios  present  an  illustration  of  the  possible 
range of impacts that changes to the MITR can have on house prices.  

14 

0153045070809101112131415161718192021a)Evolution of the share of owners with a mortgage by income situation in relation to the risk of poverty thresholdHouseholds with less than 60% of median equivalized incomeHouseholds with more than 60% of median equivalized income0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%b) Foregone tax revenue due to tax relief for access to home ownershipOtherOne-off tax relief for first-home buyersTax relief for mortgage payments-101234567a) Nominal interest rate supported after considering mortgage interest tax reduction, for selected years of first occupancy compared with the original interest rateOriginal1996200020052010201520200255075100199620002005201020152020b) Share of cumulated interest for selected years of first occupancyShare of interest not deducted from taxes (%)Share of interest deducted from taxes (%) 
 
  
 
 
     
Table 2.2: Impact of different MITR policies in households borrowing capacity 

2. 

Assessment of macroeconomic vulnerabilities 

(1) The value of the mortgage is the estimated as 100% LTV required to acquire a 100m2 dwelling, considering the 2022 
price per square meter in 2022 (EUR 8901, source STATEC), max marginal income tax rate of 46.62%, 30 years loan, 
family size equal to 4 persons and the average mortgage interest rate in January 2023 (source ECB).. 
Source: European Commission services 

References: 

Andrews,  Dan  and  Aida  Caldera  Sánchez  (2011),  “The  Evolution  of  Homeownership  Rates  in 
Selected OECD Countries: Demographic and Public Policy Influences”, OECD Journal: Economic 
Studies, Vol. 2011/1. 

OECD (2021), Brick by Brick: Building Better Housing Policies, OECD Publishing, Paris. 

OECD (2022), Affordable Housing Database. 

OECD  (2022),  Housing  Taxation  in  OECD  Countries,  OECD  Tax  Policy  Studies,  No.  29,  OECD 
Publishing, Paris, 

Overall,  a  number  of  structural  challenges  remain  to  address  the  mentioned 
vulnerabilities.  The  fiscal  treatment  of  housing  tenure  stimulates  homeowner  occupancy 
especially  via  mortgage 
instruments  supporting 
interest  deductibility  and  other  fiscal 
homeownership.  The  recent  planned  reforms  of  the  recurrent  taxation  of  immovable  property 
based  on  up-to-date  real  estate  valuations  and  measures  increasing  the  opportunity  costs  of 
unused land in urbanised areas and unoccupied dwellings are focused on supply-side restrictions. 
These measures combine with ongoing reforms of spatial planning to accelerate a more efficient 
land-use  across  the  national  territory,  including  measures  involving  municipalities  in  selectively 
increasing  residential  density  in  areas  well-connected  to  the  transport  network.  Furthermore, 
measures  aiming  to  align  housing  supply  and  demand  are  more  effective  when  integrated  in 
policies  including  local,  regional,  and  national  level.  This  strategy  should  ensure  consistency  with 
complementary  critical  policy  areas,  such  as  transport  and  education,  and  their  contribution  to 
social  impact  and  environmental  sustainability.  Housing  affordability  has  been  deteriorating  in 
particular  for  low-income  households  that  do  not  profit  from  subsidised  social  or  affordable 
housing.  The  increase  in  supply  of  social  rental  housing  can  reduce  the  affordability  issue, 
especially if access to it is made conditional on recurrent means testing ensuring better targeting to 
those most in need. The functioning of the private rental sector can benefit from relaxing the rules 
on renting parts of housing units and from conversion of existing dwellings into rental housing. 

15 

MITR policy scenarioSupported interestInterest compensated by tax reductionLoan amortizationSum of monthly paymentsBorrowing capacity with constant incomeChange in borrowing capacity vs MITR in 2022Change in borrowing capacity vs MITR in 2023(euros)(euros)(euros)(euros)(2022 MITR policy = 100)(%)(%)MITR = 031324.7016937.24826292-7.7-11.6MITR = 2000 per person27595.13729.616937.244532.41000-4.2MITR = 3000 per person25730.35594.416937.242667.61044.40 
 
 
 
 
  
 
 
2. 

Assessment of macroeconomic vulnerabilities 

Conclusion  

Luxembourg  faces  vulnerabilities  relating  to  high  house  prices  and  high  household 
indebtedness. Strong population growth pushed up  the demand for housing in Luxembourg. The 
supply of housing has not kept up with demand, restricted by the limited use of land available for 
construction and the practice of land hoarding. The increasing gap  between housing demand and 
supply resulted in strong house price increases and deteriorating affordability of housing. Increases 
in  the  price-to-income  ratio  mainly  reflect  high  valuations  of  residential  real  estate,  which  rose 
faster  than  incomes,  leading  to  increasing  financial  risks  related  to  household  indebtedness.  This 
long-term  price  dynamics  have  led  to  an  overvaluation  in  the  housing  market  according  to  the 
standard  metrics.  Affordability  concerns  have  increased  in  the  Luxembourg  housing  market,  as 
household  debt  in  terms  of  disposable  income  continued  trending  upward  and  remains 
substantially  higher,  compared  to  other  Member  States.  Despite  high  household  debt,  the  supply 
shortage in Luxembourg’s housing market helped cushioning the turn of the financial cycle. Strong 
fiscal position allowed the government to introduce measures to support households and firms and 
stabilise  the  economy.  Households’  financial  assets  are  also  high  and  because  indebtedness 
increases towards the higher levels of income and wealth, this mitigates the risks. 

Significant  policy  measures  have  been  adopted,  which  will  contribute  to  addressing 
vulnerabilities  relating  to  housing  debt  and  house  prices  in  the  medium  term,  but 
structural  challenges  remain.  National  authorities  activated  both  capital  and  borrower-based 
macroprudential  measures  with  effect  from  1  January  2021  to  reduce  mortgage  credit  related 
financial  risks.  The  measures  adopted  to  increase  the  supply  of  housing,  include  tax  reforms  for 
unused land and empty dwellings, the promotion of affordable and social housing, and the reform 
of  the  rental  market,  which  constitute  a  significant  progress  in  addressing  the  housing  market 
issues.  However,  considering  the  current  slowdown  a  step-up  in  efforts  and  prioritise  their 
implementation can stimulate housing supply more swiftly. The supply side fiscal measures can be 
more effective in combination with the ongoing reform of land-use planning. Moreover, a reduction 
or elimination over time of the mortgage interest rate tax deductibility, that was recently increased, 
would  reverse  the  current  situation  where  fiscal  policy  subsidises  indebtedness,  increases 
borrowing  and  stimulates  demand  and  provide  a  windfall  gain  to  home  sellers.  The  structural 
imbalance between housing demand and supply is expected to continue to drive up house prices in 
the  medium  term.  An  increase  in  the  supply  of  social  rental  housing  and  better  targeted  to  the 
most  in  need  can  alleviate  the  affordability  issue.  Lastly,  a  better  collection  of  data  in  the  real 
estate market can improve the design of policies and to monitor their implementation.  

Based on the findings in this in-depth review, the Communication “European Semester – 
2023  Spring  Package” sets  out  the  Commission’s  assessment  as  to  the  existence  of 
imbalances or excessive imbalances in Luxembourg, in line with Regulation 1176/2011. 
(35) 

(35)  European Commission (2023), European Semester Spring Package 2022, COM(2023) 600 final. 

16 

 
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

Graph 2.6: Selected graphs, Luxembourg 

graph e Publicité Foncière, STATEC calculations - Habitat Observatory, transactions from January 1, 2022 to December 
31, 2022; Note: C.Lux stands for the canton de Luxembourg, CM stands for the combined area of the cantons of Capellen 
and Mersch, C.Esch stands for the canton d'Esch-sur-Alzette. The east zone corresponds to the cantons of Echternach, 
Grevenmacher and Remich. Finally, the northern zone includes the cantons of Clervaux, Diekirch, Redange, Vianden and 
Wiltz 
Source: Statec, Eurostat and European Commission services 

17 

01,0002,0003,0004,000b) Number of completed dwellingsTwo and more dwelling residental buildingsOne-dwelling residental buildings608010012014017Q418Q419Q420Q421Q422Q4index (2021Q4 =100)c) Housing transactionsValue of housing transactionsNumber of housing transactionsTransaction price-500501000204060810121416182022% deviation of current priced) Overvaluation metricsModel-based valuations gapPrice to income vs. hist. avg.Price to rent vs. hist. avg.Overall valuation gap030006000900012000040000080000012000001600000C.LuxCMC.EschEstNordTotale) Regional house pricesHouses (EUR)Appartments (EUR/m2, rhs)100125150175T1T3T1T3T1T3T1T3T1T3T1T3T1T3T1T3T1T3T1T3T1T3T1T3T1T32010201120122013201420152016201720182019202020212022f) Advertised rent pricesHouseApartment010,00020,00030,00040,00050,00002004006008001000120019-0120-0121-0122-0123-01millions EURa) New loans to households for house purchaseRenegotiationPure new loansTotalOutstanding amount (rhs) 
        
2. 

Assessment of macroeconomic vulnerabilities 

Box 2: Inflation exposures and cross-border pass-through 

This box sheds light on the sources of inflation in Luxembourg and its spill-overs with EU 
partners.  The  period  since  2021  has  been  characterized  by  pandemic  aftershocks  and  global 
supply  chain  disruptions  compounding  global  inflationary  pressures  and  a  surge  in  commodity 
prices triggered by Russia’s war of aggression against Ukraine. As a result, inflation in Luxembourg 
surged to unprecedented levels. In response, wages and profits also picked up across the EU, which 
further added to price pressures in Luxembourg. With input-output data, domestic inflation can be 
decomposed  into  the  contributions  from  key  cost  factors.  Taking  into  account  some  data 
limitations, the framework can be  used to attribute consumer and investment price changes to i) 
extra-EU import price changes, which include both directly imported inflation and inflation passed 
through from EU partners import costs ii) domestic unit labour cost changes iii) domestic unit profit 
changes, including indirect taxation changes and iv) rest-of-EU value added price changes. (36) 

Data  suggests  that  much  of  inflation  in  Luxembourg  in  2022  reflected  surging  import 
prices,  which  are  projected  to  continue  driving  inflation  over  the  forecast  horizon.  In 
2022, as shown in Graph 2.7, extra-EU price changes and costs passed through EU partners were a 
key driver of consumption and investment inflation. Energy inflation contributed  only mildly. Spill-
overs from value added inflation in other EU countries also remained limited. The contribution from 
domestic  value-added  inflation,  which  covers  wages  and  profits,  was  significant  in  2022  and  is 
expected to remain sizeable in 2023 and 2024. This reflects increases in both, unit profits and unit 
labour cost, with a slightly stronger impact from the latter. Still, consumer and investment inflation 
is  expected  to  be  sustained  mainly  by  non-energy  imports  from  outside  the  EU.  Value  added 
inflation in EU partners is also set to contribute somewhat, particularly to investment inflation. 

Graph 2.7: Components of gross fixed capital formation deflator growth and consumer price 
inflation 

Source: European Commission services 

(36) The graphs below are based on national accounts data and the Commission’s Spring 2023 forecast, which are combined 

through a ‘Ghosh’ matrix based on Eurostat’s Figaro input-output available for 2015-2020. HICP is taken as the measure of 
the price of private consumption, including non-residents. Energy import prices from extra-EU reflect realised median prices 
until 2022, and energy price assumptions underlying the Spring forecast thereafter. Other goods prices reflect median 
Eureopan prices per industry until 2022, and forecast non-energy goods and service trade prices for 2023-2024. Value 
added deflators are assumed to affect all industries within a country to the same degree. For a similar analysis using an 
input-output-based methodology, see “Inflation Differentials in Europe and Implications for Competitiveness: Thematic 
Note to Support In-Depth Reviews” European Commission 2023, Institutional paper 198. 

18 

-10-5051015161718192021222324% change (year-on-year)LU: contribution to domestic GFCF deflator growth-10-5051015161718192021222324% change (year-on-year)LU: contribution to domestic CPI deflator growthDomestic ULCUnit profits (&taxes)RoEU value added deflatorEnergy imports from Extra-EUOther imports from Extra-EURoEU import cost passthr.ResidualDeflator growth YoY 
 
  
 
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

Table 2.3: Selected economic and financial indicators (Part 1), Luxembourg 

(e) estimate based on ECB quarterly data 
(1) Potential output is the highest level of production that an economy can reach without generating inflationary 
pressures. The methodology to compute the potential output is based on K. Havik, K. Mc Morrow, F. Orlandi, C. Planas, R. 
Raciborski, W. Roeger, A. Rossi, A. Thum-Thysen, V. Vandermeulen, The Production Function Methodology for Calculating 
Potential Growth Rates & Output Gaps, COM, European Economy, Economic Papers 535, November 2014. 
(2) Deviation of actual output from potential output as % of potential GDP. 
(3) Current accounts in line with fundamentals ("current account norms") are derived from reduced-form regressions 
capturing the main determinants of the saving-investment balance, including fundamental determinants, policy factors 
and global financial conditions. See L. Coutinho et al. (2018), "Methodologies for the assessment of current account 
benchmarks", European Economy, Discussion Paper 86/2018, for details.  
(4) This benchmark is defined as the average current account required to halve the gap between the NIIP and the 
indicative MIP benchmark of -35% of GDP over the next ten years, or to stabilise the NIIP at the current level if it is 
already above the indicative MIP benchmark. Calculations make use of Commission’s T+10 projections. 
(5) NENDI is a subset of the NIIP that abstracts from its pure equity-related components, i.e. foreign direct investment 
(FDI) equity and equity shares, and from intracompany cross-border FDI debt, and represents the NIIP excluding 
instruments that cannot be subject to default. 
(6) Fundamentals-based benchmarks are derived from regressions capturing the main determinants of credit growth and 
taking into account a given initial stock of debt. Prudential thresholds represent the debt threshold beyond which the 
probability of a banking crisis is relatively high, minimising the probability of missed crisis and that of false alerts. 
Methodology to compute the fundamentals-based and the prudential benchmarks based on Bricongne, J. C., Coutinho, L., 
Turrini, A., Zeugner, S. (2019), “Is Private Debt Excessive?”, Open Economies Review, 1- 42. 
Source: Eurostat and ECB as of 2023-04-28, where available; European Commission for forecast figures (Spring forecast 
2023) 

19 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Real GDP 4.70.62.62.3-0.85.11.51.62.4Potential growth  (1)3.92.22.22.21.91.92.22.32.3Contribution to GDP growth:Domestic demand 1.81.91.42.7-1.75.01.40.91.5Inventories 0.3-0.10.20.1-0.30.4-0.10.00.0Net exports 2.5-1.31.0-0.41.2-0.30.20.70.9Contribution to potential GDP growth (1):Total Labour (hours) 1.91.31.61.71.41.41.92.22.1Capital accumulation 1.31.31.00.80.70.80.70.60.6Total factor productivity 0.7-0.3-0.5-0.3-0.2-0.3-0.5-0.5-0.4Output gap (2)1.1-1.5-0.8-0.5-3.2-0.1-0.8-1.5-1.4Unemployment rate4.44.96.05.66.85.34.64.85.0Harmonised index of consumer prices (HICP)3.02.71.11.60.03.58.23.22.6GDP deflator 3.73.82.71.44.76.26.45.53.4External positionCurrent account balance (% of GDP), balance of payments6.95.74.73.43.24.65.06.15.9Trade balance (% of GDP), balance of payments28.736.540.632.632.734.728.4..Primary income balance (% of GDP)-22.0-30.6-36.4-29.5-29.3-31.0-24.2..Secondary income balance (% of GDP)0.2-0.20.50.3-0.30.90.8..Current account explained by fundamentals (CA norm, % of GDP) (3)3.74.34.75.15.25.25.35.25.1Required current account to stabilise NIIP above -35% of GDP over 20Y (% of GDP) (4)2.71.44.44.84.62.92.22.32.5Capital account balance (% of GDP)0.3-0.40.0-0.1-0.11.20.5..Net international investment position (% of GDP)22.712.164.967.863.940.428.2..NENDI - NIIP excluding non-defaultable instruments (% of GDP) (5)..-3442.3-4153.8-4148.8-4638.1-3767.0..Net FDI flows (% of GDP)..47.8107.6-32.2173.647.6..CompetitivenessUnit labour costs (ULC, whole economy)1.94.33.23.13.83.97.47.83.3Nominal compensation per employee 3.52.22.31.91.26.05.46.93.4Labour productivity (real, hours worked)1.7-1.1-0.1-0.83.4-2.0-2.3-1.8-0.9Real effective exchange rate (ULC)0.62.11.51.0-0.43.53.61.9-0.2Real effective exchange rate (HICP)1.60.40.6-0.40.10.8-1.1..Export performance vs. advanced countries (% change over 5 years)25.816.517.85.218.419.0...Private sector debtPrivate sector debt, consolidated (% of GDP)217.9287.4298.9310.8320.3340.6337.1..Household debt, consolidated (% of GDP)45.555.160.567.268.566.066.3..Household  debt, fundamental benchmark (% of GDP) (6)53.661.669.269.977.577.079.3..Household  debt, prudential threshold (% of GDP) (6)155.6153.2169.3113.1115.6100.699.4..Non-financial corporate debt, consolidated (% of GDP)172.4232.3238.4243.6251.7274.6270.8..Corporate debt, fundamental benchmark (% of GDP) (6)62.672.179.079.186.685.086.3..Corporate debt, prudential threshold (% of GDP) (6)175.0170.9183.6137.2143.5126.5123.2..Private credit flow, consolidated (% of GDP) 46.15.113.324.942.953.921.3e..Corporations, net lending (+) or net borrowing (-) (% of GDP)6.20.5-0.1-5.8-0.40.71.84.65.6Households, net lending (+) or net borrowing (-) (% of GDP)-0.10.20.51.16.12.82.83.82.7Net savings rate of households (% of net disposable income)5.56.17.98.319.112.4...forecast 
 
    
 
 
 
Table 2.4: Selected economic and financial indicators (Part 2), Luxembourg 

2. 

Assessment of macroeconomic vulnerabilities 

(7) Unweighted average of price-to-income, price-to-rent and model valuation gaps. The model valuation gap is 
estimated in a cointegration framework using a system of five fundamental variables; total population, real housing 
stock, real disposable income per capita, real long-term interest rate and price deflator of final consumption expenditure, 
based on Philiponnet, N., Turrini, A. (2017), "Assessing House Price Developments in the EU," European Economy - 
Discussion Papers 2015 - 048, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission. 
Price-to-income and price-to-rent gaps are measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(8) Price-to-income overvaluation gap measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(9) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
Source: Eurostat and ECB as of 2023-04-28, where available; European Commission for forecast figures (Spring forecast 
2023) 

20 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Housing marketHouse price index, nominal10.93.15.610.114.513.99.6..House price index, deflated8.21.24.28.313.112.43.8..Overvaluation gap (%) (7)-7.51.911.126.940.356.062.6..Price-to-income overvaluation gap  (%) (8)-10.41.517.737.550.269.380.7..Residential investment (% of GDP)3.13.23.74.03.83.33.2..Government debtGeneral government balance (% of GDP)1.00.81.62.2-3.40.70.2-1.7-1.5General government gross debt (% of GDP)7.917.721.322.424.524.524.625.927.0Banking sectorReturn on equity (%).-1.15.74.43.03.8...Common Equity Tier 1 ratio.15.926.421.122.022.4...Gross non-performing debt (% of total debt instruments and total loans and advances) (9).0.20.80.50.60.5...Gross non-performing loans (% of gross loans) (9)..1.00.60.70.60.7..Cost of borrowing for corporations (%)4.02.81.51.41.31.33.1..Cost of borrowing for households for house purchase (%)3.92.61.81.41.31.43.1..forecast