Luxembourg housing market recovery: Increased transactions and mortgage demand signal investment surge into 2026

Real GDP growth in Luxembourg is projected to reach 1.7% in 2025 and 2% in 2026, up from just 1% growth in 2024, the European Commission said in its Spring Economic Forecast published Monday morning.

“In 2025 and 2026, economic growth is expected to accelerate, as the fallout from trade restrictions initiated by the hike in US tariffs is foreseen to be more than compensated by the recovery of investment,” the commission wrote.

Recovery in investment in dwellings

The commission’s economists point to this month’s wage indexation as a measure that “should further support private demand.” And they seem to agree with Prime Minister Luc Frieden’s assessment, delivered in his State of the Nation address last week, that home building is also on the rebound. “The recent increase in the number of transactions in both new and existing construction and in mortgage demand indicate a recovery in investment in dwellings which is set to further accelerate in 2026,” the report said.

In addition, the forecast expects headline inflation to drop to 2.1% in 2025 from 2.3% in 2024, thanks to decelerating food and services prices. On the other hand, the commission says that energy prices are expected to rebound slightly following the end of the energy price cap and the introduction of a new tariff on electricity grids.

Nevertheless, inflation is likely to fall even further to 1.8% in 2026 as the price increases for energy, food and services are forecast to decelerate.

The commission also expects employment growth in Luxembourg to accelerate to 1.3% in 2025, following a slowdown in 2024. “The unemployment rate is expected to peak at 6.6% in 2025 before edging down to 6.4% in 2026 as employment recovers somewhat,” commission economists wrote. They expect employment growth to reach 1.7% in 2026.

However, the state budget is projected to turn to a deficit of 0.4% of GDP – from a surplus of 1% in 2024 – on the back of what the commission called “an expansionary fiscal stance”.

Deficit to widen slightly

Revenues from direct taxes are projected to come in at a slower pace than in the previous year. This is “due to lower windfall revenues and to the impact of the additional set of government measures to support households and companies, including a further indexation of tax brackets and a reduction of the corporate income tax rate”, the report said.

The public sector wage agreement reached in January with the CGFP civil servants’ union, combined with May’s automatic indexation of wages and social transfers, “is projected to put upward pressure on public expenditure”.

Valdis Dombrovskis said that although the EU economy is demonstrating resilience amid high trade tensions and a surge in global uncertainty, there can be no room for complacency © Photo credit: EU/Vladislav MUSIENKO

The deficit is set to slightly widen to 0.5% of GDP in 2026, as expenditure growth is expected to outpace revenue growth.

However, Luxembourg’s debt-to-GDP ratio is expected to decline to 25.7% in 2025, after rising to 26.3% in 2024, before increasing again to 26.2% of GDP in 2026.  

The Spring 2025 Economic Forecast projects real GDP to grow by 1.1% in 2025 in the EU and 0.9% in the euro area, broadly the same pace as recorded in 2024. In 2026, growth is expected to accelerate to 1.5% in the EU and 1.4% in the euro area.

Inflation is declining faster than previously forecast and is on track to reach the European Central Bank’s 2% target this year and fall even further in 2026.

 “The EU economy is demonstrating resilience amid high trade tensions and a surge in global uncertainty,” said Valdis Dombrovskis, commissioner for economy and productivity.

“But we cannot be complacent,” he added. “The risks to the outlook remain tilted to the downside, so the EU must take decisive action to boost our competitiveness.”