Housing: property market exuberance is expected to subside slightly in 2022

French people’s real-estate projects: a slight softening in market exuberance 

2021 was indisputably a record-breaking year. In addition to the absolute number of 1.2 million transactions completed in the old-build segment, the housing stock turnover rate (which had varied between 1.8% and 2.8% for the past 35 years) rose to a high of 3.3%. This exuberance in the real estate market was driven by a reaction to the health crisis with overinvestment in the personal sphere and by a real consensus in French society about the virtues of the property market. The French think it preferable to put their money in real estate (63% consider it more advantageous to invest in real estate than to own financial investments, with only 15% holding the opposite opinion); they also associate the property market with extremely positive price movements (63% consider that prices will rise over the next year versus 6% who anticipate a decline, and 42% think prices will rise over the next 5-10 years versus 13% who see prices falling).

After sharp growth in real-estate projects between November 2020 and February 2021, French people’s intentions reached a peak in May with 22% of adults saying that they wanted to buy a home within the next 12 months; this proportion rose to 39% among 18-34 year-olds and to 41% among households earning more than €5,000 per month. In contrast, however, the November 2021 summary review shows a significant decline in intentions to buy real estate. Even if intentions remain at their peak in densely populated areas and for purchase/resale projects, plans to purchase real estate have sharply declined for the younger people included in the survey, for respondents on low wages but also for the most affluent categories. It is significant that these different profiles – of first-time buyers and investors respectively – share the same view of a market that, in their opinion, is becoming more favorable to sellers and less attractive to buyers owing to the price increases observed in recent months.

Improvement work and energy performance certificates: a drive to transform the market

In contrast, however, intentions to carry out renovation work are showing no signs of abating: 80% of homeowners are planning to carry out work within the next 5 years; 39% are planning to carry out energy-efficiency improvements, and more than 70% have projects to embellish, expand or renovate their properties. In all cases, the propensity to carry out work is inversely correlated to the owner’s age while remaining less sensitive to the household’s financial security or to the density of the urban environment.

The origin of this greater appetite for renovation work may be traced (as far as enhanced energy efficiency is concerned) to a conjunction between the aspirations of the French and strong regulatory pressure. In particular, the reform of the energy performance certificate and the adoption of the French Climate & Resilience Act coming after the Energy & Climate Act, have shifted the measures taken from an ‘obligation to provide information’ to a ‘requirement to act’ in a timeframe of imminent importance to the French considering that penalization will begin as early as 2025 with the prohibition to rent out properties with category G energy performance certificates (6% of primary residences) extended in 2028 to properties included in category F (11% of primary residences). What is more, the fact that renting out property with a category E energy performance certificate will be forbidden in 2034 encourages the French to expect these restrictions to increase indefinitely over time. 

Although nearly 5 million dwellings are concerned by these measures, the issue is particularly sensitive for two types of properties and populations. Firstly, the rental-housing sector – with a stock of 1.7 million units concerned by 2028 – is directly impacted by these regulations; it is unlikely that the sector will be able to make the expected effort within the required timeframe for a number of practical reasons: the fact that the properties are occupied by tenants, condominium governance structures, etc.). Secondly, the regions where F- and D-rated energy performance certificates are most prevalent are geographically distant from the major urban areas and in relative demographic and economic decline (slump in employment) and possess a high rate of single-family houses and more elderly population categories, etc. It is justified to wonder whether public support measures will be enough to encourage these more investment-adverse social categories to take action, at significant expense (old-build single-family houses) but also in illiquid markets that limit any hope of recovering the money invested in renovation work when the property is sold. Finally, the energy performance certificate could ultimately trigger further upheavals in the housing market. The recognition of the cost of work required to change a building’s energy performance category is liable to impact negotiations and depress the price of old-build properties, especially if the market slows down and becomes more selective. The difficulty of getting large-scale improvement work approved in condominiums could also hold up transactions in certain market segments.

Outlook for the residential market in 2022

After a record-breaking year in 2021 in terms of transactions in the old-build property market segment and the distribution of real-estate loans (€240 billion in new mortgages excluding loan renegotiations), 2022 is expected to remain buoyant overall… but a number of changes currently in progress are expected to reverse this positive trend. It is true that structural factors buoying up the market are continuing to have an impact: historically low lending rates combined with what remain substantial government subsidies, sustained purchasing power and falling unemployment all maintain good creditworthiness and limit the risks on a traditionally resilient user market while demand is driven by the scale of unmet needs, the strong desire for homeownership, and the traditional image of housing as a safe investment. This demand is further increased by new growth drivers: a recurring demand for quality housing related to the emergence of new lifestyles (working from home) and a diversification of real-estate expectations (houses vs. apartments, etc.) and preferred locations (medium-sized cities, etc.), a demand for improvement work driven by household aspirations, public support measures and regulations and, finally, the return of institutional investors to the residential market.

New inhibiting factors have emerged, however, and could lead to a market reversal. For example, the end of declining interest rates – and even the beginning of an increase – precludes the possibility of offsetting or limiting the impact of rising prices on creditworthiness (as has been the case for the past 25 years) and even if the recommendations of the High Council for Financial Stability (HCSF) are now generally respected by finance providers, the strict application of these criteria is liable to weigh down specifically on rental housing. What is more, the decline in real-estate projects on the part of French households (and, notably, first-time buyers) who have been badly effected by the rise in prices for single-family homes on the outskirts of cities, and the stagnation – or even decline – in prices in metropolitan areas, are likely to dampen market exuberance in the old-build segment. Finally, the uncertainties associated with the new energy performance certificates for existing properties and the new RE2020 environmental regulations for new properties (time required to adapt to the new rules, effect on prices, legibility of non-price effects, etc.) are likely to temper demand with an element of greater caution.

Although these inhibiting factors should only gradually come into play, and still only have a limited impact in 2022, activities on the real-estate market are expected to decline slightly – notably in the old-build rental accommodation and first-time homebuyer segments – with business generated among second-time homebuyers remaining very strong leading to a limited decline in the aggregate number of transactions completed by French households of approximately 60,000 units. Prices, driven by upward trends in less densely populated areas, should continue to rise but at a slower pace owing to the fact that markets in medium-sized cities are shallower and more vulnerable after strong price increases, the tendency for first-time buyers to abandon their projects, and the emergence of price effects related to the reform of the energy performance certificates, etc. Prices are expected to return initially to about 5% against a continued background of market imbalance with increases of 7% in the provinces vs. 3.3% in the Paris region. The price/quantity cross effect is expected to support demand for home loans at a level close to the 2021 record despite the more rigorous application of HCSF recommendations.