Borrower-based measures

The Luxembourg real estate market has been buoyant for many years. A strong growth in the population combined with a limited supply in housing has driven up the residential property prices. So far, banks have contributed to the real estate demand through a strong increase in housing credit which has driven up the global level of household indebtedness. At the macroprudential level, these developments generate financial stability concerns. The repayment capacity of households is strongly linked to the evolution of interest rates and the value of household wealth depends on the continuous growth of real estate prices. Borrower-based measures contribute to contain indebtedness and to stabilise real estate mortgage credit prices. In November 2016, the ESRB issued public warnings for eight countries, including Luxembourg, on medium-term residential real estate vulnerabilities. Moreover, in May 2017, the IMF published its Financial System Stability Assessment for Luxembourg following the Financial Sector Assessment mission that took place in September and December 2016. Among the several IMF findings and recommendations, the IMF recommended the Luxembourg authorities to "enhance the macroprudential policy toolkit to include borrower-based lending limits", to "continue to strengthen risk-based monitoring of the residential real estate market", and to "close remaining related data gaps". As a follow-up of the ESRB warning and the IMF recommendations, the Luxembourgish government tabled a draft law in Parliament in December 2017. If enacted, the draft law would enable the CSSF upon request by the CdRS to enact borrower-based measures such as loan-to-value (LTV) and debt service-to-income limits.