In a report published on Tuesday, the think tank Terra Nova explains that the rise in credit rates and yields on bond investments could lead to a downward adjustment in real estate prices of around 20%. Good news for first-time buyers, less so for current owners.
This is a first since 2015: the prices of old real estate fell by 0.2% in the 1st quarter of 2023, compared to the 4th quarter of 2022, according to the Notaires-Insee index unveiled this Tuesday morning. A trend that more frankly affects houses (-0.3%) than apartments (-0.2%). Admittedly, over one year, prices remain on the rise (+3.1% for houses, 2.2% for apartments). But this number looks like a trend reversal.
Are we on the verge of a significant and lasting decline in real estate prices? This is the hypothesis posed by Terra Nova. In a report released this Tuesday, think tank class on the center-left believes that residential real estate prices could drop dramatically, by around 20%.
Rising rates, profitability of real estate
At the origin of this adjustment, the change in monetary policy initiated almost a year ago by the European Central Bank (ECB) to curb inflation, which brought interest and bond rates at levels not seen for a very long time. (…) Now, for the first time in a generation, [les taux d’intrt] rise strongly, quickly and probably permanently. The OAT rate (1) ten years, representative of the price of risk-free time, had only fallen, to the point of becoming negative at the beginning of the 2020s. However, the rise in recent months has been spectacular, details the Terra Nova report, which continues: ( …) In terms of its financial profile, a real estate asset is not very different from a long-term bond, apart from a few characteristics.
In summary, the rise in interest rates reduces the attractiveness of real estate investments, which are less profitable and more risky than bond investments. A context which, according to Terra Nova, is conducive to a fall in real estate purchase pricesso that the yield adjusts upwards and becomes competitive again with respect to other investments.
Good news for first-time buyers…
This scenario would be the most favourable, because it is macro-economically sustainable and socially necessary, according to Terra Nova: Since real estate purchasing power is governed by real estate prices and credit conditions, prices must fall enough to compensate for the increase in the cost of mortgages. Otherwise the only winners of the decline will be those who are rich enough to buy without borrowing…
Clearly, the ability of French households to access property depends on it. Already, notes Terra Nova, the rate of ownership among young modest households has been halved in the space of just 40 years.
… provided that the public authorities let it happen
But other scenarios are possible. Terra Nova anticipates, in fact, a reaction of property ownerswhich will try to slow down the decline in yields and values by demanding fiscal and budgetary support measures: deductibility of loan interest, reduction in transfer duties, reduction in the IFI… The think tank calls on the public authorities resist the temptation to add political and fiscal brakeswhich would have the effect of limiting adjustment, to the benefit of the richest and at the expense of the poorest.
For Terra Nova, the only mission of the public authorities will be toavoid a crash, by implementing transitional support measures for the construction sector. Among the tracks, an acceleration of the delivery of building permits or even renewed support for the energy renovation of buildings.
(1) French sovereign debt security, active today considered very safe.