A mixed picture
In the first quarter of 2022 real estate prices continued to increase sharply, up 7.3% year-on-year, driving new household home loans to unprecedented highs: up 9% compared with 2021 (for the period running from January to May). In terms of volume, however, the market is experiencing a significant decline. It is true that transactions in existing homes remain extremely buoyant (a total of 1.17 million transactions year-to-date at the end of March) but they have been subject to a downward trend for the past six months. In the new-build housing market, housing starts have stagnated at around 390,000 units owing to both structural weaknesses (scarcity and high cost of land, increasing number of standards to be respected, growing reluctance of elected officials to issue building permits, etc.) and economic difficulties (shortages and disruptions in the supply of building materials, higher costs, labor issues, etc.)… And it would seem that the sharp recovery in authorizations is more the expression of a desire to get projects approved before the implementation of RE2020 environmental regulations than a sign of a recovery in activities.
A socio-economic context tending to frustrate household real estate projects
The crisis has neither diminished the desire of households to buy their own homes nor tarnished the image of real estate as an investment. These attitudes may even been strengthened given the traditional view of real estate as a tangible asset protecting against the loss of monetary value. This persistently positive image enjoyed by real estate is reinforced by highly favorable property price expectations: 63% of French people expect prices to rise within the next 12 months (9% expect them to fall) and, over a 5-10 year horizon, 65% expect price increased (15% expect lower prices).
However, the extent of the inflationary shock on purchasing power (according to our BPCE-Audirep barometer survey, the French view their financial situation in a much more negative light than in February 2019 during the Yellow Vests crisis) and the fact that the middle classes increasingly share the pessimistic view of people in the lower income brackets suggests that people will take a longer and harder look before taking the plunge, or even decide to postpone their real estate projects outright. Already, only 21% of French people consider this to be a good time to buy, a figure well below the low reached during the health crisis and one that has been falling steadily for the past year. What is more, the proportion of households planning to buy a primary or secondary residence, or a rental property, hasn’t changed since November 2021 (at 18% of the population), whereas May-June is traditionally a seasonal peak for these activities. In particular, the real estate projects of social categories representative of first-time buyers – young people and people on modest incomes – are marked by a sharp decline owing to the greater vulnerability of these categories to the inflationary shock.
Switch to higher interest rates and effects of the energy transition: a changing market
Above and beyond this wider economic context, the residential real estate market is also being impacted by two factors that are leading to a lasting change in the market.
The first, of course, is the upward trend in interest rates after 40 years of virtually continuous decline. If we simulate credit rates in a normative and rather conservative fashion on the basis of a rise in OAT government bonds to 2.5% at the end of 2022, these bonds will return to their 2014 levels as early as next year. This significant and relatively rapid increase in lending rates should rapidly have a negative impact on household solvency, accentuating the market exclusion of first-time buyers – whose position has already been weakened by the rise in prices for individual homes, the application of the rules laid down by the High Council for Financial Stability (HCSF), and the legal interest rate mechanism – and forcing many households to reconsider the economic viability of their project. Given the major role played by credit conditions (interest rates, the length of loans, and the loan-to-value ratio) in the new equilibrium established between prices and solvency since the early 2000s, this upward shift in interest rates should be seen as a sudden brake on the principal engine driving up property prices in France.
The second factor is the continued implementation of energy regulations in France, with a system that moves from information and incentives to constraints and penalties. The measures taken against the 4.8 million F- and G-rated homes, particularly in the rental sector, as well as the implementation of the energy audit in the autumn, could also have a sharp impact on prices. By appraising the cost of the improvement work required to restore a F- or G-rated property to its full potential use (accommodation for owner-occupiers or tenants), the energy audit will provide an objective basis for price negotiations between buyers and sellers. By establishing powerful constraints on the rental market – which, however, are difficult to respect owing to the weak supply of rental properties – the regulations should lead to a faster rate at which F- and G-rated properties are put on the market. In a context of declining transactions and, therefore, the creation of more selective market conditions, it is likely that there will be an even wider gap in value between F- and G-rated properties and those in other energy performance assessment categories, notably in multi-family housing units that, until now, seemed to have escaped the ‘green value’ gaps noted in the single-family home sector.
Outlook for the residential market in 2023
All these factors should lead to a significant contraction in household real estate transactions, with a 5% decline in transactions in the existing housing sector in 2022 and a 9% decline in 2023, exacerbated by a reduction in new construction starts in 2023 owing to the difficult implementation of the constraints imposed by the RE2020 regulations related to disruptions in supplies, cost increases, and growing difficulties in obtaining building permits in urban areas.
Prices, traditionally more resistant to change than volumes, are expected to cool off in 2022 (+4%), continuing to benefit, however, from the momentum built up in 2021 and from the ‘catching-up phenomenon’ affecting properties in medium-sized cities and single-family homes in the provinces after a 2010/2020 decade of stagnation for real estate of this type. On the other hand, the combined effect of rising interest rates, declining household purchasing power, and the implementation of energy regulations should lead to a decline in average prices of around 3% in 2023. Indeed, the increase in interest rates raises the question of price levels above and beyond changes in trends, and the preservation of household solvency as a whole.
If this analysis proves correct, there will be a significant slowdown in lending, with outstanding loans growing by 2.3% per year, well below the rate of inflation, and with new loans, excluding buybacks and renegotiations, expected to fall by 13% between 2022 (€243 billion) and 2023 (€212 billion).