Residential real estate and credit: what to expect in 2026?

The real estate market in 2026 seemed poised to continue the recovery that began last year. However, at the end of February, the shock caused by the war in the Middle East, in an already fragile geopolitical context, further deteriorated the economic and financial environment, which was already clouded by considerable instability, according to BPCE L'Observatoire.

Is the real estate boom already behind us?

This new shock has further disrupted the real estate landscape at a crucial time of year for the housing sector. Previously, the context in 2025 had favored a recovery in sales across most markets, accompanied by a slight increase in prices that was unlikely to discourage households from pursuing real estate projects.

In the existing home market, the increase in monthly sales observed during the first two months of 2026 gave way to a decline in March (-8% compared to March 2025). Given the time required to finalize real estate transactions (approximately three months between a preliminary agreement and a final sale), the situation at the beginning of this year actually reflects a slowdown in activity that predates the recent deterioration of the geopolitical context. Due to several factors related to significant economic uncertainties, French concerns about public finances, and rising interest rates, household confidence and then purchasing power in the real estate market began to decline at the end of 2025, gradually impacting real estate projects. The relative stability of existing home prices since the end of 2024 also illustrates a wait-and-see approach that appears to be spreading and affecting both supply and demand.

After four years of decline, the new-build market finally seems to be emerging from its slump, but construction and sales levels remain exceptionally low. Starting from historic lows, some positive signs are emerging, such as the increase in building permits (+16% year-on-year) and housing starts (+14%) at the end of April. However, these do not indicate an end to the crisis and are still insufficient to reassure a sector that has been grappling with both structural and cyclical difficulties for several years. The sale of new homes by property developers has not yet benefited from the recent improvement in housing production observed, conversely, in the market for detached houses in scattered developments.

Overall, the new-build market is currently struggling to meet demand, which is hampered by issues of affordability, often due to excessively high prices or a lack of suitable housing options. The existing-build market thus offers a more accessible alternative for households with greater financial resources.

Should we expect a slowdown in the real estate market in 2026?

Since the end of February, the French economy has been facing a shock, particularly in the price of energy commodities. This has initially resulted in higher inflation, which is weighing on household purchasing power. It is also affecting the cost of inputs for businesses, which may reduce their investment spending. Finally, it is penalizing all oil-consuming economies, which are also France's main trading partners. In short, all aspects of demand are affected by the war in Iran: consumption, investment, and exports. To curb rising inflation, the European Central Bank is expected to raise its key interest rates. The recent increase in the 3-month Euribor rate already illustrates these expectations of a rate hike.

Consequently, the rise in mortgage rates is expected to continue throughout the year. For the past 13 months, this rate has already been higher than the 10-year French government bond (OAT). Moreover, such a long period of such an increase has never been observed before. However, it is possible to fairly accurately predict mortgage interest rates based on the cost of short- and medium-term funding, namely the 3-month Euribor and the 10-year OAT. Thus, a 1 percentage point (pp) shock in interest rates translates into a 14 basis point (bps) increase in mortgage rates over the quarter and a 90 bps increase over the course of a year. At 3,22% in March, interest rates on loans are projected to reach 3,43% in the fourth quarter of 2026, assuming an Euribor of 2,26% and an OAT of 3,77%. This rise in rates is likely to impact transactions, prices, and ultimately, mortgage lending.

Regarding transactions, the intentions to purchase housing expressed by the French have not shown any clear trend, either upward or downward, for almost a year. The deteriorating economic situation, with the decline in activity at the beginning of the year and the rise in the unemployment rate (+0,7 percentage points year-on-year, to 8,1% in the first quarter of 2026), will negatively impact real estate projects, which could see a 5% decrease for the year, to 1,026 million transactions. In the existing housing market, this would amount to 890.000 transactions (-6% after +13% in 2025). In the new construction market, the recovery in sales is expected to remain modest.

Regarding property prices, after rising by only 0,4% over two years, they could decline very slightly this year (-0,1% year-on-year in the fourth quarter of 2026). Finally, concerning housing loan production, demand is trending downward even though production in the first three months of the year was slightly higher than it was in 2025. This decline in demand is expected to worsen in the second half of 2026, due to rising interest rates and a deteriorating economic climate. At €175 billion, loan production is thus projected to be down 6% in 2026.

What role does credit play in a real estate purchase?

Mortgage interest rates are the key variable. Over the past 10 years, nearly 80% of real estate transactions have required a mortgage. The fourfold increase in the average interest rate for new mortgages to households between the fourth quarter of 2021 and the first quarter of 2024 has caused this share to fall to 65%. This is the lowest level recorded since 2012, the first year for which this data is available.

Over the past ten years, the link between the use of credit and its cost has been reaffirmed. The share of transactions financed by credit closely follows the trend in interest rates. Thus, over the period 2015-2025, a 1 percentage point increase in interest rates is accompanied by a decrease of nearly 6 percentage points in the rate of credit use and nearly 4 percentage points in the amount borrowed to finance a real estate transaction.

Due to the interest rate shock resulting from the inflationary effects of the war in Ukraine, new housing loan production experienced a highly volatile period. These fluctuations can be analyzed in light of the main explanatory factors. First, the number of real estate transactions is the primary driver. Property prices also have an influence, but a relatively small and consistent one. In addition, other factors can be significant at specific points, including changes in interest rates, down payments, loan terms, and regulations.

Visible across all real estate projects, the influence of interest rates varies considerably depending on the buyer category. In recent years, first-time homebuyers have stood out for their dynamism. The number of loans recorded in 2025 exceeded the volumes recorded at the end of 2019, which represented the peak of the 2010s. Conversely, other segments remain sluggish, with financing volumes in 2025 half those of the years preceding the 2022 shock. Purchasing a primary residence remains the primary reason for financing (78% by number and 83% by amount in 2025). Over the past 15 years, the structure of loans has changed significantly, with a reversal in the proportion of repeat buyers versus first-time buyers (31% and 47% respectively in 2025). This situation reflects the continued high reliance on credit for first-time home purchases. It also reports a reduction in the number of second-time buyers purchasing their primary residence on credit.

While average debt-to-income ratios remained generally stable despite the interest rate shock, other factors absorbed the shock, manifesting themselves differently depending on the customer segment in 2025:

First-time buyers had already almost reached the maximum limit on the financing period; the rebound in their loans in 2025 was mainly supported by the recent drop in interest rates;
Second-time buyers have historically been characterized by a lower loan-to-value ratio; since 2021-2022, the profile has shifted towards higher-income borrowers with a larger down payment;
Finally, investors in rental real estate, who borrow over shorter periods (nearly 20 years), are experiencing a sharp decline in average borrowing combined with a reduction in the investment envelope.

By José Bardaji, Director of Studies and Foresight, Bertrand Cartier, economist and Isabelle Friquet-Lepage, Head of Real Estate Projects and Studies for the BPCE Group.

Illustrative image of the article via Depositphotos.com.