In the last real estate forum of the year, our economists focused on how the health crisis is likely to impact residential real estate in 2020 and over the next few years.
Ultimately the health crisis had a limited impact in 2020
In 2020, the crisis ultimately had a limited impact on transactions in the existing real estate segment and on the distribution of mortgage loans. The upward trend in prices, which was particularly marked at the beginning of the year, simply continued at a slower pace without turning negative. The construction sector was affected to a greater extent but the decline in new housing starts should not exceed an annual rate of 8%.
Residential real estate – sheltered overall by the fact that interest rates are close to their historic lows (compared to rates close to 5% in 2009) and by the extremely positive image this sector enjoys in society – did not, however, remain totally unscathed by the crisis. Given the slow response times characterizing the sector, it is expected that the effects of the pandemic will only be felt after a certain period of time, with an impact on all market components in 2021 and 2022.
More tangible effects in 2021… and even in 2022
Admittedly, the extension under their current conditions of interest-free loans and the so-called Pinel tax reduction scheme until 2022, and the recent decisions handed down by the Haut Conseil de stabilité financière (“High Council for Financial Stability”) represent overall a step in the right direction and provide the players in the real estate sector with a degree of short-term visibility, notably with regard to first-time buyers and rental investment. However, while prices have reached very high levels in the major metropolitan areas and credit conditions no longer include future solvency margins, the absence of public support measures for the non-works sector is likely to reinforce the wait-and-see attitude adopted by French households and prolong the effects of the increased paucity of the operators' project portfolios.
Construction: a lasting decline?
Over the next two years, the construction sector, in particular, will be faced with a combination of many negative factors: higher production prices linked to health measures and the implementation of the 2020 environmental regulation, the non-renewal of supply in 2019-2020 owing to the organization of local elections and the uncertainties created by the COVID crisis, the transformation of household demand following French people’s new appreciation of their accommodation during the crisis, etc. New building starts could suffer a further 10% decline to 338,000 units in 2021 – or even greater than 10% in the event of a third lockdown period, before rebounding by 7% a year to 360,000 units in 2022.
Between a wait-and-see attitude and negative market expectations
It would appear that the segment for the stand-alone development of single-family homes, which saw new housing starts fall beneath the 100,000 threshold, is ultimately most severely impacted by the combined effect of the decline in the economic situation of modest first-time buyers, constraints on lending, limits on the artificialization of soil cover, and new building standards. Real estate development is also expected to suffer a sharp decline in sales to individual customers (from 130,000 annual reservations in 2016-2019 to fewer than 100,000 in 2021) before a probable windfall effect from investors in 2022 related to the reduction in the Pinel tax advantages in 2023. Although the sector will be able to reorient its model towards block sales, notably to institutional investors, it is expected to suffer overall until 2022 from the insufficiently renewed capacity to supply new housing units.
In the existing housing sector, the deterioration of the economic and social context with rising unemployment should depress demand and put buyers and sellers on a more equal footing. The resulting wait-and-see attitude is expected to cause the number of annual transactions to drop below the threshold of 900,000 units, with a progressively dampening effect on prices in the existing housing sector. Prices are likely to decline marginally in 2021, and even in 2022, by an average of 1 to 2% a year but are expected to remain buoyed up by the exceptionally low levels reached by interest rates.