Abstract
With a ratio of household debt to gross disposable income above 150%, households in Luxembourg are among the most indebted in Europe. A high level of debt exacerbates the sensitivity of household net worth to changes in house prices, which can increase the severity of economic downturns. In this note, we evaluate the implications of the COVID-19 crisis for the mortgage market in Luxembourg using data on the labour market and government interventions, as well as surveys of consumer finances (HFCS). Our conclusions are twofold. At the aggregate level, the Luxembourg mortgage market is relatively well placed to weather the shock, because a large share of residents work in sectors that are less affected by the crisis such as the financial or government sectors. However, our analysis of micro-level survey data suggests that some segments of the population may be financially vulnerable to the COVID-19 shock.
Highlights
Given the strong asymmetric impact of COVID-19 across industries, we look at the jobs distribution across sectors in Luxembourg using data from the national accounts of STATEC and from the Labour Force Survey (LFS) to study workers who live in Luxembourg
Only 1.1% have no liquid assets at all, which is higher than the national average. We report those statistics for all households with negative free cash flow: 5.8% among them keeps no liquid assets, almost one-fifth of them do not have enough cash to cover their debts for one whole month, and it increases 35% if it is for a half of a year
Given the high level of household indebtedness and the risks that this raises for both households and the financial sector, it is important to understand how the pandemic could affect the local mortgage market
Summary
The residential real estate sector of Luxembourg is a source of systemic risk to financial stability, which may have the potential for serious negative consequences for the real economy. We follow the evolution of COVID-19 cases in Luxembourg and in the neighbouring countries from the European Centre for Disease Prevention and Control and assess the impacts on the labour market For the latter, we analysed the increase in the unemployment rate in Luxembourg and the requests for partial unemployment benefits by industry using data from the Comité de conjoncture and ADEM (Agence pour le développement de l’emploi). We use the latest data in SILC to analyse teleworking probability across sectors and the HFCS Wave III for computing Luxembourg Household Balance Sheet and perform our stress test under a heterogeneous shock of COVID-19
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