New Era in the French Real Estate Market: Interest and Inflation’s Influence

April 14 2023. Welcome to a new era in the French real estate market: a period marked by the significant influence of interest rates on French mortgages and inflation. This blog article shall provide an insight into the transformation that the market is undergoing, underpinned by data from the 59th iteration of ‘Analyse de la Conjoncture Immobilière’, released by The French Notaries, “les notaires.fr” on the 15th of May, 2023.

Over the previous year, the French real estate market has witnessed a sea of changes. By February 2023, the count of transactions involving old housing units in France stood at 1,083,000. This count, however, has been experiencing a squeeze since August 2021, signaling a shift from the highly dense and extraordinarily bullish phase that came before it. The market has reset to the status observed just prior to the pandemic, a telling sign of a major shift in market dynamics.

Transaction volume has slumped into a bearish phase of approximately 5.5% since the summer of 2022, and by February’s end, it was -8.1% year-on-year. The decline has hastened unexpectedly, mirroring the notaries’ sentiment of a markedly subdued start to the year. If this tempo persists, transaction volume could potentially dip below one million by the summer’s end.

This alteration in the French real estate market isn’t an isolated incident. It’s unfolding within an environment, marked by inflation and escalating interest rates, both of which are casting a shadow over the real estate market. The new housing market is also in a state of flux, with no apparent signs of recovery. On top of that, mandatory housing energy renovation and its financing is a question that is further clouding market certainty.

The Haut Conseil de stabilité financière (HCSF), or High Council for Financial Stability, might ease its rules regarding a maximum debt ratio of 35% and loan durations that cannot surpass 25 years. This is notwithstanding the Bank of France’s reservations, as the termination of easy monetary policies is resulting in a mechanical uptick in rates. The real estate market’s turnaround is transpiring independently of these prudential rules.

In summary, the French real estate market is undergoing a transition. The volume of transactions is dwindling, and the market is being moulded by extrinsic factors such as inflation, interest rates, and regulatory modifications. These changes are introducing a new dynamic in the real estate market, the consequences of which will be borne by buyers, sellers, and investors alike.

As expounded in the preceding section, the French real estate market is going through significant transitions. An aspect of this metamorphosis that stands out is the trajectory of housing prices. After registering an annual hike of +6% in Q4 of 2022, housing prices in the provinces are forecasted to grow by only +2.4% year-on-year by May 2023’s end. Both the individual market (+2.3%) and the collective market (+2.5%) are seeing similar hikes.

Changes aren’t consistent across all regions. In Île-de-France, for instance, prices of old housing units grew by +1% from January 2022 to January 2023. While apartment prices have steadied, house prices are still on the upswing, with an increment of +2.7%. Nevertheless, these annual fluctuations, which incorporate price hikes until August 2022, still mask the fact that prices have been on the downturn since September 2022, for four successive months.

In Paris, the price per square meter for old apartments was €10,410 in January 2023, a reduction of -1.6% year-on-year. This is projected to drop to €10,250/m² in May 2023, exacerbating the annual decrease to -2.7%. This trend is generalising, and a reduction in the price per square meter of -3.4% in Petite Couronne and -1.2% in Grande Couronne is anticipated from May 2022 to May 2023.

Looking forward, the adjustments in housing prices are predicted to persist, concurrent with the shrinkage in transaction volumes. Despite the robust increases during the summer of 2022, the prices of old houses are expected to level out at +0.2% over a year. This would be the inaugural instance in seven years where annual decreases in apartment prices have been observed. These trends hint at the French real estate market transitioning into a new phase, characterised by slower price growth and greater regional disparity.

As mentioned above, the French real estate market is in the throes of a major shift. Transaction volume is contracting, and housing prices are evolving at a slower pace. These changes are not isolated events but signs of a larger transformation in market dynamics. The market is moving away from the extraordinary bullish period observed before the pandemic and is ushering in a new era, marked by differing trends and influences.

One of the pivotal factors influencing this shift is the increase in credit rates and inflation. The conclusion of accommodating monetary policies is causing a mechanical uptick in rates. Combined with an inflationary environment, this is impacting the real estate market in multiple ways. Firstly, it’s making borrowing costlier, which could diminish housing demand. Secondly, it’s escalating living costs, which could affect individuals’ capability to save for a down payment or afford mortgage payments. These factors are introducing a new set of challenges for buyers, sellers, and investors in the real estate market.

In response to these changes, the Haut Conseil de stabilité financière (HCSF) is contemplating easing its rules on the maximum debt ratio of 35% and loan durations that cannot surpass 25 years. While there is some resistance from the Bank of France, these changes could potentially offer some relief to borrowers. However, it’s vital to note that these potential changes are not a cure-all. They are merely adjustments to accommodate the new market dynamics.

The French real estate market is undergoing a major metamorphosis. The volume of transactions is contracting, and the growth of housing prices is decelerating. These changes are unfolding in the backdrop of rising credit rates and inflation, thereby creating a new set of challenges for market participants.

Moving ahead, it’s imperative to stay informed and adapt to these changing dynamics. The potential changes to financial stability rules by the Haut Conseil de stabilité financière (HCSF) could offer some relief to borrowers, but they don’t address the root issues.

The market is ushering in a new era, and it’s crucial to approach it with a comprehensive understanding of these changes. By staying informed and adapting to these changes, buyers, sellers, and investors can effectively and successfully navigate this new era of the French real estate market.