“DEAR AURORA,
I was planning to invest in an apartment for rent. I can’t actually buy my main residence because I have a job that requires a lot of flexibility. So about ten years ago I made the first investment in a rental and with my annual bonus that will allow me to have an interesting contribution, I was thinking about a second investment next year. But the real estate sector is hard to read at the moment and I don’t know what to do anymore. »
“Dear Angelique,
thank you for your question. In fact, we are going through a strange time. After an increase in average interest rates, which averaged 4.12% in October 2023 compared to 2.22% in the fourth quarter of 2022 (ie almost +2 points, all loan lengths combined, according to Observatoire Crédit Logement/CSA), households lost considerable purchasing power.
Understand the economic context to better read the real estate market
This is because when the interest rates applied by the bank increase, while the maximum level of indebtedness remains the same (around 30%), your credit capacity will decrease. So, with the same income, you can borrow less and therefore buy less, smaller, less beautiful, etc.
So why this increase in interest rates you ask? It’s not the banks that suddenly decided to harass you. In reality, banks follow strict rate guidelines and must adjust to the central bank’s key rates (the ECB in Europe). It was the ECB that decided to raise rates, which had an impact on the retail banks and therefore the offer your high street banking advisor gave you.
So you add: but why did the ECB want to harm me so much? Make no mistake, the ECB wanted to do the right thing. The rise in interest rates is a lever in the fight against inflation. You must also have felt that it happened last year, this increase in prices, with many causes (the invasion of Ukraine, the rise in energy prices, the need to support the economy in a time of restrictions, etc.) . By raising its key rate, the ECB affects liquidity: if it costs more to borrow, we borrow less, so less money is available. And so if there is less money available, we buy less stuff. And that is why the demand for goods and services from individuals, as well as businesses and public organizations, is falling. This slows down price growth. So maybe you’d rather pay €5 for a packet of pasta than borrow at 5%, but that doesn’t seem to be a central bank bias.
So let’s go back to our real estate topicand let’s see what this means specifically:
There is always a certain amount of time between rising rates and falling prices. Sellers see the value of the property they wanted to sell go down, wait for prices to rise and hope it’s a bad situation. This is why we see a 20% drop in transaction volume in 2023 compared to 2022. And for good reason, the average decline in real estate, all asset types combined, is only 1% compared to 2023. Over the past ten years, it has been 30% on the entire territory of the metropolis (INSEE). And it is estimated that the reduction required to offset the decline in purchasing power associated with the rate hike would be 20%!
Will I buy: yes, but under what conditions?
So it is certain that there will be more and more “limited” sellers; They have been holding off on selling for several months in the hope that things will pick up again, but some of them will be forced to sell despite adverse market conditions. If you keep your purchase plan, you’ll want to carefully negotiate the purchase price for two reasons:
- You will have lower borrowing capacity and higher interest: if you want to take advantage of the favorable rental income, you will have to limit the price of the property.
- Depending on the location, the type of property, its condition… It is possible that you still buy it a bit expensive compared to the bear market, and therefore its value continues to decrease afterwards. Although the decline in prices will eventually level off, be prepared for this, especially if you think you will need to sell the property fairly quickly.
To answer you, yes, buy a flat next year, why not, but it will depend on the exact moment and you should not pay a high price for it.
To buy or not to buy, that is the question:
Now this period also invites us to ask ourselves whether or not to buy a second rental apartment. You are no doubt aware that managing leases takes time, exposes you to the risk of non-payment, is subject to increasingly stringent regulatory restrictions… So if a rental investment is a well-known investment, be aware that market conditions present other opportunities for it to consider. And all the more so in the logic of diversifying your financial assets, if this first apartment already forms a significant part of it.
financial investments linked to debt, like bonds, can have advantages: by putting yourself in the position of a lender, you reap the benefits of high rates rather than suffer them. Therefore, low-risk and liquid investments, such as euro funds or term accounts which pays almost 4%.
As you surely understand, in times of crisis we realize that real estate is a risky and cyclical asset like any other. It is up to you to see what seems best to your sensibilities: if you enjoy work, laying tiles and revising the electrical circuit of the apartment is your hobby, then yes, this expertise can contribute to maintaining interest in real estate investments. If, on the other hand, you are interested in real estate to limit your risk and have little time to devote to it, it may be more strategic to postpone the selection to other solutions, at least until the situation stabilizes.