French real estate is currently undergoing a major upheaval of the forces that have supported it over the past twenty years. After a golden period characterized by abundant liquidity and stimulative policy measures, the market has reached record levels, making a turnaround inevitable. 

Heavily dependent on credit, it only took a few tougher conditions and higher rates to put an end to this prosperity. As a result, real estate purchasing power has collapsed, and patience will be needed while prices adjust. To return to equilibrium at current rates in the fall of 2023, a 20% drop in prices would be necessary.

Moreover, the French housing stock is in poor condition, and regulations on the quality of housing have recently changed, imposing new constraints on builders and owners of energy-intensive homes at the worst possible time. 

Banks, in a declining market, are reluctant to ease their lending conditions. While the government is looking for solutions, new players are already designing the real estate of tomorrow with innovative purchase or ownership models, supported by technological advances. A 40% decrease in real estate loans granted between August 2022 and August 2023 illustrates the scale of the challenge. Although this decrease was expected, it remains significant.

In the area of new real estate, the most heavily taxed taxpayers were encouraged to invest by measures such as the “Robien” law, which became “Scellier”, then “Duflot”, and finally “Pinel”. During this period, real estate prices increased more quickly than household income, creating a bubble.

A market correction was expected in 2018 and 2019, but the pandemic brought the economy to a halt, triggering a crisis that shook the markets a few months later. Even before the crisis, in 2019, the High Council for Financial Stability (HCSF) had issued new recommendations to protect borrowers, which became mandatory on January 1, 2022. 

Since then, the maximum term of a mortgage in France has been strictly limited to 25 years, or 27 years with a 2-year grace period, and the debt ratio, including insurance, must not exceed 35%. In January 2022, interest rates were still at 1%, and prices continued to rise.

However, rates quickly climbed to an average of 3.90% over 20 years, an increase so rapid that commercial banks were unable to keep up, forcing some buyers to postpone their projects. In September 2022, exceeding the usury rate threshold became the main reason for loan refusal, with 45% of applications rejected for this reason.

Although this technical problem of wear and tear has been partially resolved, the market decline persists. The French real estate market, as elsewhere, is heavily dependent on the distribution of credit, and with the rise in interest rates, the difficulties are increasing. A 15% drop in sales volumes and a 10 to 15% decrease in prices are already anticipated according to the most conservative forecasts.

The long-awaited correction seems inevitable. While the existing sector is managing to adapt as best it can, the new sector is going through a deep crisis. This scenario, which many refuse to believe, could nevertheless come true. 

A major dysfunction bears witness to this: new housing prices continue to increase by 6.4% on average in the second quarter of 2023 compared to the previous year, despite a 25% drop in reservations in 2022 and 34% since the beginning of 2023. 

The law on thermal sieves, in force since 1 January 2023, prohibits the rental of the most energy-intensive properties, forcing owners to undertake renovations to comply with new environmental standards. In addition, the ECB raised its key rates to 4.50% last month, for the tenth time since July 2022, with no sign of stopping. 

These factors are causing severe disruption to an already turbulent rental market, while millions of French people, eager to change their surroundings since the lockdowns, are facing increasing financial obstacles. 

The pandemic has delayed the impact, but inflation and rising rates have exacerbated the situation: buyers are unable to acquire properties, and until prices are adjusted to compensate for this rise in rates and the loss of purchasing power, the market will not be able to stabilize. 

Currently, prices would have to fall by 22% or wages would have to increase by the same amount to restore equilibrium. And it is clear that this will not happen any time soon?