As we thought the real estate market was picking up again after the Covid episode, the political and economic upheavals of 2023 brought their share of novelties. 2023 marked the end of the exceptional upturn of recent years. Supported by historically low interest rates, sales volumes had reached record levels and prices had seen a significant growth. Since then, the cost of credit has increased, inflation has made a strong comeback, leading the market into a new phase of transition and adaptation.
What adjustments occurred in 2023? What does 2024 have in store for us? Spoiler alert: the French real estate market is and remains a safe bet, offering attractive opportunities. PATRIMOLINK offers its detailed analysis of 2023 to help you better navigate 2024.
A resilient real estate market
2023 reshuffled the cards of the French real estate market. After years of continuous increase in sales volumes and prices per square meter, the market contracted. The Notaries recorded 885,000 transactions at the end of November 2023, compared to 1,208,000 in the previous year.
The decline may be impressive, but given the economic conditions that explain it, it reflects a real resilience of the French real estate market as an investment asset.
Transactions volume in France until August 2023
French economy experienced rising inflation and a significant slowdown in overall economic activity. Real estate, like other sectors, could not escape. However, it showed its strength with a volume of sales that remains significant. It is approaching the figures of 2018 (965,000 sales), considered by the Notaries at the time as very good, before reaching record levels in the following three years. This dynamic can be seen as a return to a more “normal” and healthy market situation.
Interest rates on the way to stabilization
For reference, the record volumes of 2020 and 2021 were driven by historically favorable interest rates (around 1%). However, this trend has reversed since late 2022. Figures from the Bank of France show a fourfold increase in overall rates since the last quarter of that year. All market players expected a rebalancing sooner or later.
This sudden increase is the direct result of the European Central Bank’s anti-inflation policy. By raising its key rates, it pushed banks to adjust their commercial rates, increasing the cost of real estate credit.
More than the level, it is indeed the speed of the rate increase that posed a problem. If we compare with our European neighbors, or take a look at the amounts from previous years, a rate of 4% does not seem so extravagant. In the late 1990s, loans were often around 9%, excluding insurance. The current cost of credit in France is in line with market reality. However, the very rapid pace of this increase may have blocked access to credit.
This is due to the usury rate, a little-known concept to the general public that has become very important in 2023. It is the maximum rate at which a bank can lend. Calculated by the Bank of France, its purpose is to protect clients from excessive rates. Over the past year, the Bank of France has agreed to review this rate on a monthly basis (instead of quarterly) to better adjust urgently to the very rapid increase in the cost of credit. Some investor files found themselves caught between these two rates, and technically excluded from borrowing.
What to expect in 2024? Most likely a lull in interest rates. According to Credit Logement-CSA’s surveys, the average rate for loans over 20 years should stabilize around 4.5% for non-residents. The increase in inflation seems to be easing. According to INSEE, 2023 showed a slowdown in consumer prices. Therefore, it can be hoped that central bank rates will gradually adjust downwards, limiting the rise in commercial rates. It can already be observed that banks are returning to the real estate credit market, a good product to attract new clients.
A new dynamic is emerging, with conditions still favorable. Real estate loans remain an effective lever for wealth creation and a real bulwark against inflation, especially in France. Our French legal framework protects and favors the borrower. Rates are fixed, and can be renegotiated downwards (never upwards).
A continuous rent increase
The rise in inflation does not necessarily mean bad news. The IRL (Reference Index of Rents) is also increasing. For the record, this is the Reference Index of Rents published by INSEE every quarter (see graph below). It determines the maximum rent increase that can be demanded by a landlord when the lease provides for an annual rent adjustment clause.
Law No. 2022-1158 of August 16, 2022 introduced a temporary and derogatory cap in response to the exponential and rare inflation in the variation of the IRL between the 3rd quarter of 2022 and the 1st quarter of 2024 at 3.5%. Even capped, this revaluation is interesting: few other products are appreciating at 3.5% annually in the current context.
IRL evolution over the years
The increase in the IRL allows landlord owners to increase rental income, excellent news for rental investment.
Dynamic market fundamentals
Another argument in favor of investing in the French real estate market: the intrinsic dynamism of the market. The demand for housing is not weakening in France, as shown by the increase in national rental tension.
Rental tension is defined as the ratio of the number of available properties compared to the number of tenant applicants. According to the study published by LocService.fr, rental tension increased from 2.71 in 2022 to 3.35 in 2023 nationwide.
This reality is explained by several concurrent factors. First, the supply: the French market suffers from a chronic shortage of housing. New construction is far from sufficient (see the figures from the Notaires de France – October 2023 Conjoncture Note below). In 2023, it encountered many difficulties: credit tightening, labor shortages, increased construction costs, material shortages, decreased issuance of building permits due to anti-urban sprawl policies.
The new properties market – key figures / Housing construction Sept.2023
Given this reduced supply, demand is booming. It is driven by population growth, albeit less and less significant, but still positive. The French population increased by 0.3% in 2023 (natural balance of +47,000 people), as in 2022 (compared to an average of 0.4% between 2014 and 2019) (see INSEE graphs below).
Figures of birth, death and natural growth of French population over the years
The size of households is declining sharply. As INSEE says, “Households are becoming smaller because unions are more fragile and the population is aging.” The extension of healthy life expectancy and the increase in divorces support the demand for housing.
Household size in France over the years
The combination of all these factors boosts the rental market. French real estate is supported by solid fundamentals, which have shown their robustness through crises. New construction, traditionally more expensive, now offers attractive negotiation margins.
An expected but still little visible price adjustment
The decline in purchasing power and the increase in credit costs are putting pressure on prices. Many actors in the sector expected it as a mechanical consequence. However, the Notaires note that “the announced price adjustment is timidly underway, with sellers not yet accepting a substantial drop in their price” (except for those who need to sell quickly). Seller caution is understandable, as it requires updating the entire market reading software.
Another reason why the decline is not yet visible: the strong growth of previous years. Charles Marinakis, President of Century 21 France, speaks of a “deceptive” decline: “It must be remembered that from 2015 to 2022, prices continued to rise in France: +34% for houses, and +26.6% for apartments. On average over this period, a property saw its value increase by +4% per year! The current decline in prices does not even erase a year of growth…”
Even though still barely perceptible, this decrease is happening: prices fell by 1% over a year in August 2023 in metropolitan France, a first since the end of 2015. The reduction is geographically and qualitatively heterogeneous. According to the Notaires (see table below), it is stronger for old houses (-3.2%) than for apartments (-2.7%) across the territory. The centers of large metropolitan areas such as Nantes, Amiens, Lyon, or Toulon, and even Paris and the Île-de-France region, are not spared. The entire Île-de-France is experiencing a 6% decline, therefore stronger than the rest of the country, all types of properties combined.
Beware, these averages should be taken with caution. Not all districts of Paris have decreased by 6%, some are still increasing. Therefore, generalizations should be avoided, and the context of your purchase should be carefully studied to ensure buying at the right price.
Latest trends in prices: existing appartements / existing houses over the last 3 months and the last year
A dynamic of prices influenced by external factors
Properties with poor Energy Performance Certificates are more affected by a loss of value. Dwellings classified as G (consuming more than 450 kWh/m²/year in final energy) are no longer considered decent since January 2023 and are excluded from the market. Since the end of August 2022, it has also been prohibited to increase rents for properties classified as F and G.
“Seize this opportunity! The apartment price has gone from indecent to unaffordable!”
Investors (and their banks) know that significant work will now be required to profit from these houses and apartments. These constraints impact the value of the properties concerned: compared to a D label, an apartment classified as F or G will lose 2 to 11% of its value, 3 to 19% for a house on average. The Notaires speak of the “green value” of a property.
Impact of energy labels on existing houses prices, by region, in 2021 in comparison with the reference of existing houses classified D.
We are witnessing a transformation of the market as we knew it. The usual price dynamics have been reversed: peri-urban areas are appreciating faster than city centers. Demand is currently shifting to the outskirts of these large cities (more accessible in terms of price), medium-sized cities, and (semi-)rural municipalities (within the sphere of influence of a dynamic city).
However, some cities are still doing well, such as Nice or Brest, due to strong rental tension. Therefore, one must be wary of generalizations announcing significant declines everywhere in France.
2023 was undoubtedly a pivotal year. The transaction records driven by easy and cheap credit are behind us. But more than a “crisis” or a “collapse” of the French real estate, it should be seen as a gradual rebalancing of the market in favor of buyers. This return to volumes and prices more in line with market reality was expected by sector professionals, who now expect a recovery in 2024.
The factors that impacted the sector were primarily exogenous, and they did not undermine the intrinsic robustness of the market. If the dynamics have evolved, the fundamentals of the French real estate remain very solid. It’s up to investors to draw conclusions and seize the opportunities! As the saying goes, “buy on the sound of the cannon, and sell on the sound of the bugle.”
Content provided for informational purposes only and does not replace current regulations. Without consultation with our experts, Patrimolink cannot be held responsible for any consequences of implementing the advice and information provided in this article.
