How will residential real estate prices evolve in France? (Note)

Purpose of the article: This article aims to provide an overview of the French residential real estate market, as well as the medium-term outlook in light of the COVID-19 crisis.

Summary :

• The Covid-19 crisis, like the response of governments and central banks, is reshuffling the deck for a number of economic sectors and bringing about many structural changes to the global economy.
• In this context, the real estate market is undergoing many changes, the causes and consequences of which it is important to study in the coming months.
• In France, real estate remains above all an asset that enjoys strong confidence from the various players and is seen by many observers and investors as a profitable long-term investment.
• Overall, the real estate market appears to be a strong safe haven in the post-COVID economy, leading to an overall rise in prices (excess liquidity, savings), even if a few moderating factors will cloud the outlook in the coming months.
• Nevertheless, our findings show that the market is in fact very heterogeneous and two-tiered. It is therefore not particularly relevant to study it from a single national perspective.

The real estate market is a major component of a country’s economy. The Covid-19 crisis has caused a historic recession, prompting an immediate response from governments and central banks. In France, however, the residential real estate sector is expected to be spared due to a number of factors leading to overvalued prices (increased liquidity, high savings, low mortgage rates). Nevertheless, major geographical and territorial changes are expected to take place, leading to disparities in the French residential real estate landscape.

1. Overview of the French real estate market until the Covid crisis

In the long term, since the 1980s, investment in residential real estate has clearly been « profitable, » as shown in Figure 1. Real estate prices and their value relative to household income show that investment in these illiquid assets has been highly profitable in the long term, as indicated by the exit from the  » Friggit tunnel. » Indeed, the ratio of real estate prices to household income, which had remained stable since the end of World War II, nearly doubled between 2000 and 2020 in France.

The subprime crisis in 2008 and the sovereign debt crisis in 2011 were significant moderating factors, with prices falling before picking up again in 2016 and recently returning to their pre-crisis levels. This slowdown was mainly explained by the fall in household credit, with tighter lending conditions. However, these crises did not bring housing prices, relative to household income, back to pre-2000 levels, as they reached historic highs compared to economic growth.

More generally, the relationship between economic prospects (GDP growth) and real estate prices had been validated until now, even if it was not symmetrical. Major crises have generally led to a more or less sharp decline in residential real estate prices, mainly explained by rising unemployment, declining purchasing power, the absence of clear economic prospects, but above all the direct tightening of credit conditions.

The Covid-19 crisis has been the period of deepest recession since World War II (an estimated -8.3% for 2020 in France). Paradoxically, real estate prices continued to rise throughout 2020, partly due to institutional demand, which remained very strong, as well as household demand, which remained steady for certain types of properties, with credit still readily available. For example, the LPI-SeLoger barometer estimates a 6.5% increase in housing prices in France in 2020, despite the pandemic. To date, the most expensive city in France remains Paris, with an average price per square meter reaching nearly €10,700 at the end of 2020, compared to around €8,000 in 2015 and slightly below €3,000 in 2000.

In order to study the expected outlook for real estate prices in France, it is necessary to look in detail at the fundamental determinants that drive price changes on the demand side, the most important of which are household disposable income, borrowing rates, unemployment rates, and savings rates. These various indicators highlight a number of tensions in the French residential real estate market linked to the coronavirus crisis.

2. Undeniably, factors of tension on the French real estate market

Since March 2020 and with successive lockdowns, residential prices have been subject to a certain amount of volatility due to very unusual periods in the functioning of property purchases. This explains the price changes observed in certain French cities. Beyond this temporary volatility, certain indicators suggest that residential prices will undergo particular changes in the coming months.

The decline in mortgage rates is one of the most important factors in understanding the evolution of the real estate market over the years. Since 2009, average mortgage rates have been on a downward trajectory, as shown in Figure 2, which is also consistent with the decline in the ECB’s key interest rate.

The outlook for moderate inflation and growth is prompting central banks to step up their unconventional policies. They are expected to maintain the very low interest rate environment that has characterized European economies for several years. On the other hand, due to the degree of uncertainty, banks are currently tightening their credit conditions and becoming more cautious, accepting only the most secure applications. On this point, the European Central Bank’s BLS surveys reveal that banks are likely to tighten their credit conditions until the end of 2021 due to economic difficulties, before potentially « opening the floodgates » of credit as the economic situation improves, leading to a gradual rise in real estate prices in France.

The gradual return of economic and health confidence would have the direct consequence of encouraging investors to place their accumulated money in assets with higher returns: equities and unlisted assets (private equity, infrastructure, and real estate). We are indeed seeing a strong correlation between money creation and the increase in asset prices, one of the most important of which is real estate. The amount of liquidity created by the expansionary monetary policies of central banks could lead to a surge in real estate prices in the coming months.

A key factor in the study of the real estate market is the savings rate, which reflects the confidence and outlook of households and investors regarding the economic prospects. During 2020, bolstered by the increase in forced and precautionary savings, the savings rate has skyrocketed to unprecedented levels in all OECD countries (the savings rate is expected to exceed 22% of gross disposable income in France for the whole of 2020, with a total of around €100 billion saved, according to the Banque de France, December 2020 forecasts). Figure 3[4] shows the trend in households’ ability to save (ability to save in the present and in the future) and their opportunity to save (synthetic confidence indicator). Beyond forced and/or precautionary savings, this increase in savings could logically lead agents to seek to reinvest this money in safe assets, known as « safe havens. »

For a real estate purchase, the increase in savings allows for a larger personal contribution, facilitating the financing plan. Certain categories of households would then be more inclined to reinvest their accumulated cash during the crisis: indeed, overall savings were « very heavily concentrated in the last two deciles. […]. Nearly 70% of the increase in savings comes from 20% of households »[5].

These factors putting pressure on the real estate market should be viewed in parallel with a number of indicators of market moderation, which remain uncertain at this stage. Indeed, rising unemployment, post-crisis layoffs, and the situation of households in difficulty will slow down purchases by part of the population, particularly first-time buyers, and may lead to the eventual sale of homes to repay the private debt that some households may have accumulated during the crisis. The peak in unemployment, expected to reach just under 11% in 2021 according to the Banque de France (December 2020 forecasts), mainly affects French people on short-term contracts, entrepreneurs, and the self-employed, who have been hardest hit by the economic recession and the effects of health restrictions. Every two weeks, Dares analyzes the situation on the labor market during the health crisis. This shows a decline in youth hiring during successive lockdowns, leading to a gradual deterioration of the labor market.

However, any analysis of the French real estate market would be incomplete without mentioning the regional disparities and structural changes that are likely to encourage French people to invest in certain types of property.

3. In reality, there is great geographical disparity in the real estate markets in France.

A number of structural changes are likely to encourage French people to invest in real estate in the wake of the crisis. Successive lockdowns and the widespread adoption of remote working have increased the desire to move closer to less densely populated areas than large cities, explaining the relative decline in the Paris real estate market during December 2020. To this end, the real estate tension index (graph 4)[7] is an interesting indicator for understanding the direction of prices and the real estate market in French regions. Calculated by Meilleurs Agents, it compares the number of buyers to the number of sellers in France and allows certain predictions to be made for 2021.

The French market is particularly heterogeneous. While some cities are already seeing real estate prices fall in early 2021, according to the LPI-Se Loger Barometer (such as Nîmes, Toulon, and Nice), others are experiencing a sharp increase in demand and therefore prices (Strasbourg and Lille), driven by a particularly strong real estate tension index.

Overall, city centers are likely to be the main losers of the crisis, as households seek to concentrate in more outlying areas that are more conducive to teleworking. The impact is likely to be strongest in suburban neighborhoods and in rural areas close to cities, due to increased household demand. On the other hand, Paris is expected to see a sharp slowdown in real estate demand, leading to a moderation in prices, with significant differences depending on the type of property and size. The real estate tension index there has fallen from 36% in 2019 to 5% in 2021. This is because the structural fundamentals that fueled price increases in Paris before the crisis are not expected to increase at the same rate now. For example, real estate prices in central Paris have already fallen by 0.5% in January 2021, according to MeilleursAgents.

Figure 5 shows interest in searching for different types of properties based on Google search terms. From March 2020 onwards, searches for home purchases and second homes skyrocketed, before returning to more normal levels from November onwards. Searches for apartments, on the other hand, remained relatively stable throughout the period (excluding lockdowns). Although internet searches are not directly representative of the market as a whole, they do provide an indication of agents’ interest in different types of property.

Conclusion

In France, real estate has not been a direct victim of the Covid crisis, thanks in particular to its attractive status as a « safe haven. » On the contrary, a clear trend seems to be emerging: the market as a whole is currently enjoying strong confidence from households and investors. According to a September 2020 study by SeLoger, 82% of investors « consider real estate to be the most attractive investment, » reinforcing its status as a safe haven.

Providing a figure for price changes at the national level does not really make sense given the significant disparities in the French real estate market. Some areas are becoming much more attractive, while city centers, which are not conducive to teleworking, are becoming less and less sought after overall. However, a major real estate crash due to overvaluation in previous years does not seem to be a likely scenario for the coming months. A continued increase in prices could be observed, but this would ultimately remain limited (in line with the still mixed economic outlook) and very uneven across the country, resulting in a two-speed market. The data and developments over the coming months will need to be closely examined in order to understand the trends related to price movements during this unprecedented health and economic crisis.