Selling in a real estate market in crisis.

Selling in a real estate market in crisis.

The pitfalls to avoid. The advice to follow.

Note: this article is written by Marc Neuen personally, without any help from ChatGPT.

Important: this article was written in October 2023. At the beginning of 2024, the new government decided on measures to revitalise the property market. Some of these measures, as well as a European directive from 2023, have a major impact on the decision to sell flats with an energy passport class F or worse in 2024. If you own such a property, which is NOT your main residence, we strongly advise you to read our article on which properties to sell in 2024.

—

Everyone knows it by now. The Luxembourg real estate market is going through a deep crisis.

The latest official statistics from Statec announce an average drop of 6.4% and a drop of 13.6% on existing houses. But these statistics are based on the notarial deeds of the second quarter, that is to say on sales agreements most often signed at the beginning of 2023.

But since then, interest rates have risen by almost 2 points (i.e. more than 50%) and selling prices have fallen accordingly.

Today, professionals in the “existing properties” sector agree to talk about a drop in prices that generally stands between -15% and -25%.

It’s hard to accept, but it’s reality.

And we shouldn’t be afraid to say it, out of honesty and transparency towards the owners.

Of course, these drops are not homogeneous. Recent apartments, in very good condition and requiring no refreshment work can be sold closer to -15% while old houses that require major work are more at -25% … or more.

But whatever it is, the drops are generalised and significant.

The first question you should therefore ask yourself is:

Are you obliged to sell now?

The alternatives to selling depend on your situation and vary mainly according to occupancy: do you still live in the building yourself or not?

If you do not live in the building you have the choice between selling and renting. (We exclude here the option of leaving the building empty, which seems to us to be the least interesting alternative, or even unreasonable in a rental market in short supply.)

What speaks in favour of renting?

• Rental prices are at a record level, so you can get an interesting rental return.
• You can defer the sale until prices start to rise again. So you will get more on the sale and in the meantime you will receive rents.
• You benefit from depreciation to reduce your taxable base.
• If you still have a loan to repay, you also benefit from debit interest to deduct from your taxable base.

What speaks against renting?

• If it was your main residence until now and you give the property for rent, the capital gain will be taxed when you sell. By deferring the sale you risk losing in taxes what you can gain in price increase.
• If you have taken out a bridging loan to finance your new property, you probably need the liquidity from the sale and you cannot afford to give the property for rent.
• If you still have a loan in progress and the rent does not allow you to cover the monthly payments, you will have to finance the difference every month.
• You may have to invest in renovation work to rent your property well. Ditto if it is an apartment and most of the co-owners decide to start work on the building.
• If it is an older building with a poor energy passport, the longer you wait, the more likely you are not to be able to sell without significantly improving energy performance (cf European directive) and therefore investing.
• If you come across bad tenants, your property may be damaged or you may have problems getting tenants out when you decide to sell.

What other points should be considered?

• Even if the market rents are high, be careful not to exceed the legal limit of 5% of your investment. If you have therefore acquired the property a long time ago, you may not be able to apply the market prices.
• Consider “social renting”. You will receive less rent but the agency that takes care of the social renting guarantees you the return in good condition and other benefits, such as regular and hassle-free payment of the rent.
• If it is an inherited property and one of the heirs does not want to sell, think about the principle that “no one is forced to remain in joint ownership” that your notary can explain to you in detail.

If you live in the building to sell, you must first ask yourself WHY you want to sell.

• If you want to sell to become a tenant it would be logical to defer the sale. Because why sell when real estate prices are low while rents are high? You would lose on both sides.
• If you want to sell to buy a smaller property, it would also be more opportune to defer the sale. The loss you will incur on the sale of your larger property will probably exceed the gain you can benefit from on the purchase of a smaller property.
• If you want to sell to buy a larger property, selling in a crisis market can be profitable for you. If you touch e.g. 20% less on the sale of your property at 500,000 EUR but you gain 20% on the purchase of the new property at 800,000 EUR, you will have a final advantage of 60,000 EUR. This is all the more true if you are not obliged to sell while the seller of the object you want to buy is obliged and finds himself in a difficult situation. You could thus hope to sell at -15% while you could find a property whose owner is under pressure and who would accept an offer at -25%.

Each situation is personal and only you can decide if the advantages outweigh the disadvantages or not. In any case, we hope to have given you here the main bases for thinking and deciding with full knowledge of the facts.

If after all these reflections, it tempts you to defer the sale until the market picks up again, another factor is important: how long are you willing to wait?

Everything suggests that the real estate market will regain momentum and that prices will start to rise again one day.

It’s the simple game of supply and demand. With a 33% drop in building permits in the first half of 2023, which follows a 27% drop in 2022 and a population that is expected to grow (up to 1 million in 2050), the lack of housing will become more and more blatant. In such a context, prices can only increase in the medium term.

The big question is: when?

As prices are very sensitive to interest rates, and as rates are mainly driven by inflation which remains high, we cannot expect a rapid drop in interest rates.

According to the opinion of many experts and financial analysts, rates should fortunately stabilise soon, but at a high level. It will then probably take until at least the start of 2024 to see the first drops, which will however probably not be strong enough to boost prices.

Our opinion, very personal and non-binding, is that prices will continue to fall a little in the short term, to stabilise in 2024 and start to rise slowly in 2025. But before returning to a real dynamic and prices that will increase significantly, we will have to wait until 2026 or even 2027.

And this will only be the case if inflation is under control and if the global, European and Luxembourgish economies do not fall into recession.

If you opt for putting the sale on hold until prices return to their historical levels, be prepared to arm yourself with patience… it will certainly not be enough to wait until fall of 2024.

You have thought carefully, and you have decided to sell…

At Homexperts, we have recorded an average of almost one sale per week since the beginning of the year. So even if it is slower and more difficult to sell, it is not impossible. But you have to do it right and avoid the main pitfalls.

What are the most important pitfalls to avoid?

By far, the biggest pitfall is to launch the sale with a price that is too high.

In the dynamic market before the crisis, this was much less risky. Rates were low and some buyers were willing to pay any price to secure a property. And even if the price was exaggerated, the evolution of prices meant that six months later, it was no longer.

Today, it is quite the opposite. The market is flooded with properties, the buyer has plenty of choice… but he has far less means.

Today, there is no chance of selling if you do not start with a realistic price for the current market. So what are the pitfalls that would make the price unrealistic?

Firstly, the mistake of basing yourself on the advertised prices of other properties, without questioning them.

To understand this point well, you need to know that there are currently three types of sellers on the market:

• Owners who have their backs against the wall, between acquiring a new property and bridging loan on the old property they are obliged to sell. These owners find themselves with two loans on their backs and a strict deadline for sale. The more these owners approach the deadline dictated by the bank, the more they are willing to lower the price. You will therefore find on the market some properties at very low prices.
• On the other hand, you have many owners who want to try a sale but are not obliged to sell. The typical example are heirs of a property. They are willing to try a sale because they prefer not to be in joint ownership or rent out the property in question, but they are not at all willing to sell at any price. Very often these properties are displayed at unrealistic prices (where a serious agency would not even accept the mandate) and will not find a buyer. But these properties distort market prices.
• In between, you have “normal” sellers who want or need to sell, but without having their backs against the wall and who have been well advised by their real estate agency.

If you are not an experienced professional who follows the market almost daily, it is therefore very difficult to find your way around and have a realistic view of prices by consulting advertisement prices.

What’s more, as sellers are by nature optimistic about their own property (known in psychology as “overconfidence bias”), they tend to overvalue their property compared with others and compare it with the most expensive similar properties.

So if you start analysing the prices of similar properties on property portals, it’s human nature to overvalue your own property.

If, in addition, you come across an estate agent who does not carry out a proper critical analysis of the market or who accepts the seller’s desired price without much discussion, the “losing duo” is formed and the misadventure can begin.

Another trap is to follow the maxim “let’s try anyway with this price. If it doesn’t work, we can always negotiate or lower the price later“.

Again, this is human and understandable.

But above all it’s dangerous and counter-productive.

Almost without exception, when you start with a price that’s too high, you don’t get any calls, so you don’t get any viewings, and so you don’t even get the chance to negotiate. In the end, the only solution will be to lower the price. But in the meantime, the ad will already have lost its appeal because it’s “burnt out” and with a bit of bad luck the market will have become even more difficult and you’ll have to lower the price even more than if you’d started straight away with a realistic price.

And finally, the last major pitfall is choosing an agency that doesn’t have the experience and reliability needed to sell successfully in a difficult market. The dynamic, ‘easy’ market of the last 15 years has unfortunately produced a large number of agencies that have managed to get by in a constantly growing market but lack the backbone to sell successfully in a market that has become really difficult. There will be fewer and fewer of them, but there will always many around.

So you need to make sure you work with a reputable agency that has the (high) budgets to invest in property portals even in times of crisis, that has managed to keep its best (and therefore often most expensive) staff and that monitors the market and each file individually.

We’ve had owners contact us who had been with the same agency for 1 year, who never contacted them to advise them to lower the price to bring it into line with market trends. If a property was put up for sale in the summer of 2022 for  1,000,000 EUR and no buyers were found even though interest rates were around 1.3%, how can they expect to sell it in the summer of 2023 at the same price if interest rates have cost buyers almost 300,000 EUR in purchasing power. It’s irresponsible to let ads like this languish and take away every chance the owner has of selling at an acceptable price when there’s still time.

In a market in crisis, it’s more important than ever to work with a well-established, ethical agency that advises clients honestly and transparently from the outset and throughout the sales process.

Just as it is important to listen to and follow their advice.

How does Homexperts set itself apart to provide the best possible service to its customers in times of crisis?

Before the sale:

• As always, we compile a complete file on the property, which we submit to 3 certified partner agencies in ordert to get 3 independent valuations.
• At the same time, we carry out our own analysis to have a benchmark based on our own experience.
• We then carry out a comparative analysis of all the estimates. If necessary, we confront the agencies’ estimates with those of their peers and with our own.
• On the basis of this in-depth analysis, we draw up a summary that enables us to give you the price we consider realistic, as well as a low range and a recommended price to display.
• If our estimate seems too low and you wish to attempt the sale for a price that does not seem realistic to us, we say so openly and we prefer not to accept the mandate if we cannot reach agreement.

During the sale:

• We follow up weekly with the partner agency you select for the sale. This ensures that the agency is doing a thorough job, and every week we check how the file is progressing.
• We monitor the market in general and the impact of changes in interest rates on prices.
• If, on the basis of our monitoring of your file and the market in general, we feel that we need to intervene in any way (e.g. change the price, adapt the strategy, modify the advert, etc.), we will consult with the partner agency and let you know our recommendations.
• We will advise you objectively if you receive any offers. Do we think they are really good, acceptable or should we make a counter-proposal?
• If necessary, we can add a second partner agency along the way.
• As always, we’ll support you right through to a successful sale.

We invite you to find out more about how we work and the many advantages we offer on our website.

And if you’re ready to launch your sale with a reliable, honest and transparent partner, don’t hesitate to contact us by E-mail or on 585 506.