From the pandemic to the war in Ukraine and the return of inflation, the real estate economy is irremediably subject to monetary policy and global flows. Thus, prices and sales have increased disproportionately in developed countries after COVID with historically low interest rates; then prices will slow and sales will fall in 2022 with interest rates at a 10-year high.
The minister responsible for housing, Patrice Vergriete, launched the warning during the Real Estate Managers Circle conference: “There is a huge gap in France between real estate development and the purchasing power of households. For a long time there has been a fear that this country is a kind of bubble. This speculative bubble, the day it bursts, the crisis is serious and that is what we are experiencing today. » The minister draws attention to the possibility of a crash due to the fall in real estate prices, which the Americans call the “black swan”.
But what is a speculative bubble?
A bubble is fueled by speculation, that is, when a buyer invests in the hope of making a big profit. It can also occur in the event of an influx of supply, such as an overproduction of housing or an employment crisis, where households are no longer able to repay their loans. A bubble bursts when values are so out of proportion that everyone wants to sell. This is not the situation we are in: there is certainly a gap between prices and the purchasing power of buyers, but the market is not speculative.
Are rising rates making prices affordable?
According to the European Central Bank (ECB), the solution to making housing prices more affordable is to increase mortgage rates and reduce demand by reducing the purchasing power of buyers. This is not working: despite more than a year of rising rates, it is clear around the world that prices are not falling proportionately.
On September 14, the ECB raised its benchmark interest rate to 4.75%, the highest level since the creation of the euro. Christine Lagarde remains committed to her creed: to fight inflation with the risk of economic recession. In the Eurozone, inflation is certainly falling, to 5.5% year-on-year in June, but this figure remains far below the set 2% target.
Real estate situation around the world
Globally, inventories remain low due to a deficit in new construction and a wait-and-see approach to the market buying and selling existing properties. The global market is not a speculative market like France in the 1990s, and prices are resilient. A significant number of owners do not negotiate the sale price; sales are hindered by owners who do not commit to a more expensive loan. At the same time, the share of non-credit financing is increasing. Middle-income tenants or first-time buyers are prohibited from entering the property. Rather than a “black swan” effect, we are creating ideal conditions for a new social divide.
Regional variations are more or less pronounced, but the trends at the end of 2023 are very similar. In the United States, average prices increased by 10% during the first five months of 2023, certainly with a decrease of 6% at the same time in 2022. The number of sales there shows -2%, representing all even 8 million housing units. In France, according to official data from notaries for the second quarter of 2023, prices increased by 0.5% year-on-year, with -15% sales volume in existing properties, -34% in new properties. In Germany, prices will fall by 3.5% in 2023. In the UK, values are expected to fall by around 3%, with the number of home sales completed during 2023 21% lower than in 2022, the lowest level since 2012. Prices in Canada fell by an average of 4%, with the number sales fell by 13%.
What scenario for 2024?
Current housing problem – and it’s global – it’s a lack of supply. As of 2019, America is missing roughly 4 to 5 million homes. For France and Germany, the need for new housing is estimated at 400,000 per year. This goal is far from being achieved. “This is due to population and employment growth outpacing new home construction,” said Lawrence Yun, an economist at the National Association of Realtors. “Then the shortage worsened during the first year of the COVID-19 housing boom as many looked to take advantage of historically low interest rates. The shortage intensified when mortgage rates soared as homeowners refused to sell and lost the benefit of their locked-in low rates. »
Lawrence Yun sees two future scenarios depending on various factors.
The first is “some easing” of the economy and inflation, which could lead to a slight drop in mortgage rates and more buyers entering the market. It would also depend on whether developers start construction and renovate existing housing.
Property prices will not collapse in this scenario,” Yun said. “Property price growth will depend on the ability of housebuilders to bring sufficient supply to the market. »
The second scenario is when an economic recession leads to job losses, resulting in foreclosures and a loss of consumer confidence. This would also lead to much lower interest rates and around 70-80% of households with stable employment could benefit from these rates.
“We will not see a repeat of the housing market crash of 2008 to 2012. There are no subprime mortgages to collapse, no combination of massive oversupply and overproduction of housing,” he declared.
The current real estate market is not speculative, prices are justified by high demand with a lack of real estate on the market. The central bank’s monetary policy has only a marginal effect on real estate prices. The adjustment is made according to the sales volume. This has the effect of excluding a section of the population with middle incomes from property ownership. By being wrong about the causes, we are also wrong about the remedy. Public authorities must be extremely attentive to support the dynamics of housing and private investment.