The residential real estate market has not taken full measure of the crisis

Opposing forces are expected to exert pressure on housing supply and demand in France, leading to a probable contraction in the market: on the one hand, housing needs are likely to increase with potential changes in the criteria and aspirations motivating households; on the other hand, the general deterioration of the economic environment will reinforce household concerns about rising unemployment and income trends, and weigh down upon morale.

Old-build real estate: prices remain resilient

Apparently out of step with economic reality, residential real estate in the old-build segment proved to be resilient in 2020 with an aggregate total of more than one million transactions year-on-year at end-November, down by only 4% compared with a record-breaking year in 2019. The Ile-de-France region, an exception to the general rule, saw its volumes fall by 31% over the same period while the breakdown of sales shifted in favor of the Greater Paris region (which accounted for 48% of the region’s sales in the third quarter of 2020 compared with an average of 43% in 2019, according to the Notaires du Grand Paris foundation). In Paris and the inner suburbs, markets characterized by high price levels suffered a greater contraction owing to a number of factors: a drop in business activity depressed by successive lockdown periods and the imposition of curfews, a relative loss in attractiveness owing to a demand for greater living space and housing quality, which was more difficult to satisfy in sectors where the supply and type of housing both fail to satisfy these new criteria.

Although the pace of growth slowed in the third quarter of 2020, the year-on-year increase in the price of old-build housing came to an average of 5.2% in France: the average price of apartments and houses rose by 6.5% and 4.2% respectively, compared with an average annual increase of 2.5% for house prices over the past three years. This average is rising automatically as a result of a structural change in the market (high prices and tighter conditions for granting home loans) that is more favorable to the wealthiest households, looking for higher quality and more expensive properties.

However, the geographical regions most sensitive to the risks of business failure and rising unemployment – both of which are set to increase in tandem with the economic crisis – will find it difficult to escape a downturn in real estate activity. The same is true for sectors where prices have reached excessively high levels.

New-build real estate: structural factors exacerbated by the effects of the crisis

The new-build real estate sector reports lackluster results and anticipates no rapid return to the production rates that prevailed before the onset of the health crisis. New housing starts (all types of housing units combined) fell by 7% in 2020 (of which -9.1% in multi-unit housing, excluding accommodation in residential homes, and -7.2% in single-family housing), reaching a total of 376,700 units, a level not far from the lows observed in June 2009 and June 2015. Similarly, building permits suffered the effects of the lockdown periods on new construction work following the slowdown in activities before, during and after the municipal elections. As a result the number of building permits fell by 14.7%, foreshadowing a delay in future programs. Between the shock in new construction and contractions in the sale of new housing (multi-unit and single-family housing taken together), the real estate development sector must now focus its efforts on rebuilding its supply of housing units, something that will take time considering the lag in the start of new projects. Over a sliding twelve-month period, annual reservations for new accommodation were down 18.5% at the end of September 2020 yet still exceed available supply. This difficulty in boosting new housing supply, combined with production constraints and their inevitable impact on construction costs and the pressure of demand precludes any reversal in general price trends. In the third quarter of 2020, average prices for apartments and homes in housing developments reached high levels that are respectively 23.1% and 19.3% higher than prices observed ten years ago. 

Although single-family houses in the stand-alone sector (as opposed to homes in housing developments) are preferred by the French, this segment has continued to lose ground over the past 20 years, representing only 29.4% of new construction at the end of 2020 (compared with 52.4% in 2000). In its capacity as an alternative solution to the housing needs of low-income households, the single-family home is being frustrated by measures taken to combat climate change and to promote biodiversity (impacts related to soil artificialization and issues related to mobility owing to the distance between residential areas and places of employment).