Will the trend continue at the end of 2022?
What will your real estate project look like in 2023? This is definitely one of the most asked questions today. Here are some thoughts on the themes that will dominate the real estate market this year to determine the outlook for French real estate in 2023.
The effect of inflation on real estate
After years of rising prices and rising sales, last year saw a turnaround in the real estate market.
This change is particularly explained by the high inflation characteristic, which reached 6.2% per annum at the end of the year in 2022. The price increase had two effects on the housing market.
First, companies with rising production costs (such as raw materials and fossil fuels) passed on these price increases to protect their profit margins. This “cost-driven” inflation thus pushed up the prices of new construction, crowding out the most modest buyers.
Then, to curb inflation, the European Central Bank (ECB) decided to raise its key rate, the rate at which it lends to commercial banks (called second-tier banks), starting last July.
Banks then raised lending rates to protect their profit margins, which affected real estate projects and led to a decline in sales.
According to Observatoire Crédit Logement, mortgage lending rates fell from an average of 1% in January 2022 to a record low of 1.5% at the end of June and 2.25% at the end of November 2022. This ratio should exceed 3% in 2023.
As a result, the market expects a tightening of borrowing conditions in 2023, with the ECB’s medium-term inflation target of 2%, almost 5 times higher than the current inflation rate.
As for 2022, will 2023 be implemented in two phases?
Fears of inflation (5.9% in December according to INSEE) and rising interest rates after the war in Ukraine have outweighed the real estate frenzy in France.
“In the summer, transactions for apartments and houses tend to slow down,” said Charles Marinakis, president of Century 21, a chain of real estate brokerages.
However, the first six months of 2022 have been dynamic, with Fnaim (the National Real Estate Federation) allowing cumulative sales over a year to exceed 1.2 million last August. An annual operating balance of 1.1 million sales at the end of the year in 2022 is a good result.
“After the health crisis, the slowdown for highly sought-after homes has been more pronounced than for apartments,” said Charles Marinakis.
Thus, 2022 took place in two phases: the first six months continued at the pace of 2021 before weakening in the second half. Will 2023 see the numbers reversed?
The role of environmental measures
In certain regions of France, especially popular with foreign clients (such as the PACA region or Paris), we can observe real estate shortages and price increases due to high demand and limited supply.
But another factor will finally affect the real estate market in 2023: measures in favor of the ecological transition. German economist Isabelle Schnabel, a member of the Executive Board of the European Central Bank, points to another phenomenon after “fossil fuel inflation”: “green inflation”, or “greening”.
This refers to the costs of measures aimed at the development of green technologies, including renewable energies, with the introduction of stricter regulations.
Prices are expected to fall in the old real estate market next year. This may be particularly due to buyers wanting to get rid of their property before it becomes too complicated for buyers to get a loan or before certain regulations regarding “energy sieves” are introduced in France.
The climate and sustainability law prohibits the rental of residences classified as “energy sinks” in France. The G, F, and E classes will no longer be available for lease in 2025, 2028, and 2034, respectively.