The new build sector squeezed between rising costs and declining household solvency.
After 2022, a year when new housing starts declined to a level close to their ten-year average, the year 2023 began with a monthly new construction rate below the 30,000-unit mark. The new-build sector has borne the full brunt of successive waves of negatively impacting events: the Covid-19 crisis, the new RE2020 environmental regulations, shortages of building materials, and the general rise in inflation. The increase in the construction cost index, which is easily outstripping the rise in consumer prices, is a source of considerable upward pressure, further exacerbated by the resilience of land prices relative to the wider economy. The winding up of programs in the large Integrated Development Zones (Zones d'Aménagement Concerté or ZACs) with a fragmentation of the supply of land available for private players, the implementation of the Zero Net Artificialization measures in less densely populated areas, and the adoption of policies designed to limit urban density in large cities are making it increasingly difficult to obtain building permits in both densely and sparsely populated areas, and are helping to keep land prices high owing to the scarcity of supply.
The real estate development sector, which has already found it difficult to replenish its supply over the past two years, seems to be facing a sharp decline in demand. Reservations in Q4 2022 fell by 30% compared with Q4 2021 (the lowest 4th quarter since 2008) despite the positive impacts of the tax benefits offered by the so-called Pinel tax reduction scheme until the end of 2022. Another sign of the weakening in demand is the cancellation rate, affecting a total of 20% of quarterly reservations. The inventory of unsold properties rose to 114,400 units at the end of December 2022, equal to nearly 15 months of sales. Faced with rising costs accentuated by higher expectations regarding housing quality and a simultaneous decline in household solvency triggered by the increase in interest rates, the real estate development industry needs to take a fresh look at its business model. Geographical diversification into the more relaxed real-estate markets in the B2 and C zones – to avoid the constraints of limited land availability in very densely populated areas – only provides a partial response to the problem owing to the faster increase in unsold inventory in these less tense real estate markets.
In the single-family home market, the number of reservations has declined significantly after two good years in 2021-2022. Deeply impacted by the zero net artificialization target and more sensitive to the tension between costs and prices owing to their more frequent positioning in the low-income homebuyers segment, single-family home builders are also adapting their business model, notably by diversifying into home improvements and renovations. Finally, social rental housing has also been hard hit by the rise in the rate of interest paid on Livret A passbook savings accounts and by the need to undertake energy renovation work with the related mobilization of a significant portion of the companies’ own financial resources.
Overall, the limited availability of land, higher construction costs, declining household solvency, and the refocusing of housing policy on energy renovation should continue to weigh down on new construction in 2023 and 2024, with new housing starts falling to 355,000 and 340,000 respectively for each of these two years.