Luxembourg has seen an unprecedented rise in homeownership prices in the last decade, hinting the existence of a speculatory bubble. Housing bubbles can have catastrophic effects on surrounding economies, so identifying them is paramount. This paper investigates Luxembourg’s housing prices and related factors in search for evidence of this bubble.

The method consists of a two-stage econometric analysis of homeownership prices (dependent, HPI used for proxy) and its determining factors (independent, e.g. interest rates, incomes, population, etc.) spanning the last 15 years. First, all the time-series are tested for stationarity using the Augmented Dickey-Fuller test. Second, homeownership prices are tested for bivariate cointegration with the independent variable time-series using the Engle-Granger method. Cointegration of time-series is evidence of a shared long-run equilibrium, so absence of such relationships indicates market dysfunction. Under specific conditions, a speculatory bubble becomes the likely culprit.

We identified no strong, statistically significant cointegrating relationships between homeownership prices and any of their determining factors. In combination with other indicators, we consider this to be admissible evidence for the existence of a bubble in Luxembourg’s housing market. We also suggest policy measures that could alleviate this potential bubble and discuss their likely outcomes.