The outlook for residential real estate in 2025

Existing and new-build property: a structural transformation

Since 2022, the residential real estate market has been deeply impacted by a structural transformation of its operating conditions. Under the effect of multiple factors – the economic environment marked by a resurgence in inflation, the sharp rise in construction costs and the switch to a new interest rate environment, changes in the socio-demographic context reflecting the priorities of an ageing population and the emergence of a new work ethos, a desire for housing that prioritizes the quality of the living environment, or geographical preferences favoring less densely populated areas – the determinants shaping demand and the creditworthiness of potential buyers have triggered lasting changes in the housing market. Players in the new-build segment in particular have been caught in the jaws of a dilemma comprised of rising costs (wages, construction materials, interest rates, etc.) on the one hand, and a decline in customer purchasing power on the other, with the former pushing prices up and the latter requiring them to fall, a situation exacerbated by the continuing pressure on available building land with growing scarcity in densely populated areas and difficulty in finding it in less densely populated areas owing to the goals of ‘zero net artificialization.’

All in all, the economic model adopted by the construction industry has been durably weakened and the sector has seen a reduction in its business potential (bankruptcies, loss of employment with redundancy plans, etc.). In short, the industry remains depressed, notably for the construction of single-family homes. With 250,000 new housing starts expected in 2024, construction in France has fallen to levels not seen since the mid-1950s, with no prospect of recovery before 2026. On the other hand, however, the existing housing market in 2024, although once again showing signs of weakness, remained well above the low points reached in 2009 and 2012-2014, and already enjoys potential for recovery.

Positive signs for household demand

The wave of the BPCE L’Observatoire-Audirep barometer survey fielded in November shows renewed household interest in real estate. Following a rebound noted in June, the proportion of French people planning to buy a property rose again in November. This illustrates the prevalence of a strong desire to buy a home, especially among the younger generations, as most of these potential buyers consider that now is a favorable time to buy. French people’s expectations of lower interest rates and higher property prices confirm their positive view of the market overall. At the same time, the reduction in interest rates observed in recent months and the upturn in new lending are beginning to ease the pressure on borrowing conditions. As a result, the deposit rate and the proportion of cash transactions (acquisitions without a mortgage), which had reached a record high in Q1 2024, began to return to normal, moving in the 3^rd quarter of the year to a level close to that observed in 2023.

However, the buoyancy of this rebound in household demand is overshadowed by economic and political uncertainties. The French – who are increasingly sensitive to the risk of rising unemployment and feel concerned (according to 71% of the people included in the survey) about the level of public debt – express widespread unease about France’s economic prospects and the possibility of higher taxes. A total of 25% and 31% respectively plan to postpone or forego certain expenditures. Whether these threats to people’s economic wellbeing find expression in higher interest rates, higher taxes or a feeling of paralysis in the country, current uncertainties are liable to neutralize the positive direction of household demand for housing.

Outlook for residential real estate in 2025

Credit indicators (rising demand for bank mortgages and falling interest rates) create a rather favorable environment for a rebound in real estate markets. This trend is likely to continue in 2025 albeit to a lesser extent than initially expected, with average lending rates of around 3.2%, which would fail to achieve a return to the ex-ante situation. Property prices, meanwhile, appear to be losing momentum, to the effect that the French are increasingly anticipating a landing in this downward phase, which began as early as the end of 2022 in the greater Paris region. Thanks to the cumulative impact of falling interest rates and lower property prices, households’ purchasing power for existing homes began to recover in 2024. From 2020 to 2023, demand shifted in favor of less densely populated, and frequently less expensive, geographical regions, a movement that helped to restore solvency to households wanting to embark upon a real estate project. This trend influenced the structure of demand and weighed down on average prices for existing homes, calculated on an adjusted statistical basis (spillover markets).

The context of structural crisis and the atrophy of the new-build property development sector should limit the scope of recovery in new construction in 2025. Projections for 2025 indicate, at best, a slight uptick with 260,000 new housing starts if we assume a revival of the sector, notably in the single-family home sector, thanks to lower interest rates and the implementation of a ‘universal’ zero-rate loan (even if the nature and timetable of this reform in 2025 are highly uncertain at present). For real estate development, the reorientation of housing policy towards the renovation of existing homes and the abandonment of the so-called ‘Pinel’ tax exemption scheme for rental investment are expected to put the brakes on any market rebound, despite concessions on prices.

For existing homes, the median scenario adopted strikes a balance between the potential recovery in demand with the risks of households abandoning their projects as a result of political uncertainty:

• 2024 is expected to mark the low point in the market for older homes, with 775,000 transactions, the combination of declining activity (strong adjustment on volumes) / downward pressure on prices resulting in a limited decline (-2%) in Q4 2024, at a time when the real value of homes had already fallen sharply since the end of 2022 (due to inflation). After a 40% decline in new lending in 2023, it is estimated that 2024 saw a further year-on-year fall of 15%, to 118 billion euros (excluding loan refinancing operations and the renegotiation of existing mortgages), a trend that can be explained by volume and price effects but also by the rise in the down-payment rate and the sharp increase in the proportion of homes purchased for cash.
  
• A limited recovery is expected in 2025, with 825,000 transactions in existing homes, accompanied by a trend towards greater price stability (+1%) after two years of decline. The modest recovery in property prices, combined with a slight increase in overall housing sales, is expected to boost the annual production of new home loans to 132 billion euros by 2025 (excluding loan refinancing operations and the renegotiation of existing mortgages). After a decline in 2024, outstandings are expected to rise by just 0.5% in 2025, i.e. by less than the rate of inflation, continuing the trend towards a reduction in household exposure to home loans.

This median scenario can be framed by two alternative scenarios: one favorable in the event of a stabilization, or even reduction, in the interest rate spread with Germany and also in the event of a more active policy of budgetary support for housing; the other unfavorable if the OAT-Bund spread widens simultaneously with a deepening of the political crisis in France, triggering a shift in household interest rate expectations in a context of uncertainty with its attendant dampening effect on market players.

Renovation work to improve the energy-efficiency of residential property: broadening the scope of incentives to drive new renovation in this area

France has structured its energy transition policy around sectoral initiatives that have been successful in helping to reduce greenhouse gas emissions, albeit unevenly across sectors. In the residential property sector, the DPE mandatory energy performance assessment has become the preferred means of compulsion with a timetable that will progressively penalize the ownership of the least efficient G, F and E-rated properties as of January 1st, 2025. And yet, while the DPE is having an ever-greater impact on households’ real estate choices (it’s an important criterion for 76% of buyers and it’s a reason for selling for 43% of sellers), intentions to carry out energy-efficiency renovation work are showing only slight progress, at a rate well below France’s stated ambitions and targets.

The first obstacle lies in the fact that homeowners significantly overestimate the energy efficiency rating of their property: 17% of owners of a primary residence think they own a property with an E, F or G rating whereas, in reality, these properties represent 37% of the total housing stock. In addition to this misconception of the real need for energy-efficient renovation, there are two further weaknesses linked to intentions to carry out work: only 5% of French people are planning to do so in the short term, with the majority of intentions being deferred to a longer, and therefore more uncertain, timeframe, while less than a third of projects involve overall renovation, with the vast majority concerning one-off, partial improvement work.

On the other hand, the French are much more interested in undertaking other types of work – home improvements, adaptation of homes to the need of more elderly residents, major building maintenance, extension of floor space or creation of annexes – with 61% expressing intentions in this area, including 7% in the short term, chiefly in their principal residence, but they are less likely to consider using credit to finance these projects (39%). What’s more, there exists a strong correlation between intentions to carry out energy-efficiency renovations and intentions to carry out other types of work, namely the same typical profile of respondents and a strong appetite for undertaking work in both areas. At a time when the country’s population is ageing rapidly as the baby-boom generation (who, very frequently, are owners of single-family homes) enter advanced old age, new opportunities are emerging from an alignment of the timetables for renovation work and the population cohorts concerned with the need to adapt housing to old age and the need to meet the objectives of the energy transition.

Housing renovation, in the broadest sense of the term (including energy-efficiency renovations, adapting homes for the elderly, and improvement or refurbishment work), can therefore be viewed more globally.The convergence of needs and aspirations (lower running costs, quality of life, comfort in old age, etc.) forms a set of motivations that is probably more effective than mere awareness of the energy transition in transforming ‘intentions to carry out work’ into ‘actual projects.’