Construction, household demand, ECD effect and price outlook: where is residential real estate going in 2023 – 2024?

The new construction sector has been hit hard by the successive effects of the Covid-19 crisis, the RE2020 crisis, shortages of materials and then the general rise in inflation. The increase in the construction cost index, much faster than that of consumer prices, exerts strong pressure which adds to the resilience of land prices. Indeed, the end of the programs in the large ZACs with a fragmentation of the supply of land from private actors, the implementation of the ZAN in sparsely populated areas and policies to limit density in the large cities limit obtaining authorizations in very dense sectors as well as in diffuse sectors and contribute to maintaining high land prices due to scarcity.

The real estate development sector, already struggling to replenish its supply for two years, seems to be facing a sharp drop in demand. Reservations in Q4 2022 fell by 30% compared to Q4 2021, the lowest 4th quarter since 2008 despite the attraction represented by the tax advantages of the Pinel scheme until the end of 2022. The withdrawal of demand is also illustrated by through the cancellation rate which reaches 20% of quarterly reservations. The stock of homes available for sale rose to 114.400 units at the end of December 2022, i.e. nearly 15 months of sales. Faced with a rise in costs accentuated by expectations of quality of housing and, at the same time, a drop in household solvency linked to the rise in interest rates, property development must revisit its model. Geographical diversification in areas B2 and C, to escape land constraints in very dense areas, only partially answers the question, given the faster rise in stocks in these less tight areas.

In the single-family home sector, the decline in reservations is very noticeable after two good years in 2021-2022. Strongly impacted by the ZAN objective, and more subject to the tension between costs and prices due to a more frequent positioning on the segment of modest first-time buyers, builders of individual houses are also changing their model, by diversifying in particular towards development and renovation. Finally, social rental is hard hit by the rise in the rate of the livret A and by the need to undertake energy renovation work which mobilizes a significant part of own resources.

All in all, the low availability of land, the rise in construction costs, the decline in household solvency and the reorientation of housing policy towards energy renovation should continue to weigh on construction in 2023 and 2024 with building sites falling respectively to 355.000 and 340.000 for these two years.

Housing demand remains resilient but is declining

At the start of 2023, the pessimism of households is more clearly marked than during the Covid-19 crisis in 2020, in particular concerning their purchasing power. This pessimism is reflected in a decline in 2-year home purchase intentions. Only 14% of French people think it's a good time to buy (compared to 34% in February 2022), 45% being of the opposite opinion. However, this very degraded vision of the economic situation does not translate into a loss of confidence in real estate: the aspiration to own one's home remains very strong in society and a majority of French people continue to anticipate an increase real estate prices over the next 12 months and over the next 5 to 10 years. Thus, questioned in February 2023, 17% of French people say they have a plan to buy a home within 12 months, a drop of only one point compared to February 2022 but a recovery after the decline in November 2022 With specific regard to the second home and rental home segment, however, there is a decline in purchase plans among the highest incomes and the highest wealth which raises fears of a significant decline in rental investment in the short term.

Regarding sales projects, the trend is stable or even slightly upwards, allowing the market to be supplied with new housing supply. About half of potential sellers express fears about the selling time or their ability to sell at the expected price (47% and 46% respectively), two indicators that have deteriorated slightly but have not broken with previous quarters. Therefore, faced with the alternative of having to give in at a lower price or waiting for an improvement in the market, 60% of potential sellers would favor waiting and postponing the sale, which is quite traditional for periods at the start of decline in real estate and leads to consider a slowdown in the market, first marked on quantities, then gradually more noticeable on prices. All in all, despite the fall in purchasing power and the rise in interest rates, household demand for real estate has therefore not collapsed but is entering a period of questioning, selectivity and lengthening of lead times. realization of projects.

The Energy Performance Diagnosis (DPE) has a growing impact on prices but still limited on the demand for energy renovation

With approximately 30% of final energy consumption and 17% of greenhouse gas emissions, residential real estate plays an important role in the national low-carbon strategy adopted by France. The acceleration of the energy transition calendar and the shift from information to constraint with the ban on re-renting housing classified G in 2025, F in 2028 and E in 2034, have profoundly changed the way in which the DPE is taken taken into account today in the real estate choices of the French.

Today, 74% of potential buyers believe that this is a determining criterion for their acquisition, 16% being of the opposite opinion. Faced with a property classified F or G, only 14% believe that this would not have an influence on their choice, while 30% consider it on the assumption that the price would be attractive and that 43% would prefer not to. . At the same time, for about a third of the sellers, the DPE played a role in the sale of their property. This growing selectivity of households with regard to ECD should accompany the traditional tendency to widen the price differentials between goods by favoring goods without defects and by attributing a discount to goods of lower quality in periods when the market declines.

This phenomenon should have a more marked impact on small areas for rental and on individuals where the price difference between houses classified Fou G and those classified D often reaches 15% according to the annual study of notaries. The implementation on April 1, 2023 of the energy audit, mainly for individual houses, should accentuate this gap by objectivizing, via an evaluation of the works, a measurement of this negative green value of goods classified F or G.

While the “price signal” of the DPE seems to be better and better understood by the French, their appetite for carrying out energy renovation work does not seem to have changed significantly and seems out of step with the GHG reduction objectives assigned to residential real estate. Indeed, for 18 months, the proportion of French owners considering such work within 5 years has remained stable at 39%, while 70% of them say they are considering embellishment work. Moreover, the low efficiency of the “one-step” logic of most of the work undertaken is not up to the needs which would require overall renovation choices, certainly more expensive but much more effective in fine. Even among lessor owners, who are more directly concerned by the measures mentioned, the appetite for carrying out this work in the short term is low because, for the most part, they either do not know the DPE of the rented accommodation, or they overestimate its classification.

Therefore, although the inclusion of the DPE in the evaluation of the price of goods is well advanced, its impact on the implementation of energy renovation works is still limited, thus limiting the probability of achieving the objectives of reducing GHG fixed to residential real estate for 2030.

What scenario for prices for transaction volumes in a context of sharp decline in household solvency?

The rise in housing loan rates, which began in Q1 2022 following the tightening of the ECB's monetary policy, continues in 2023 and could continue into 2024 with an average rate of 3,7% for new credits over 10 years (TESE, excluding insurance and other ancillary costs). The monthly update of the wear rate since February 2023 has partially refluidified the market. This renewed amplitude will allow real estate interest rates to rise more quickly, in line with the financing costs borne by lending institutions, which to date remain higher than the average refinancing rate with the ECB (3,5%) and 10-year OAT (varying between 2,5% and 3,25% over the first 4 months of 2023). This movement will make it possible to reintegrate part of the demand which had previously been excluded by the scissor effect between the level of real estate interest rates which rose monthly and the level of the usury rate which was every three months.

This upward trend in rates leads to a loss of solvency, significantly impacting household projects. In February 2023, more than 70% of French people with a purchase project believe that their project has been impacted by the rise in interest rates, resulting in either the renunciation, the postponement, or the modification of the characteristics of the project.

Ex-ante, the decline in the borrowing capacity of a borrower with the same income and the same borrowing conditions, between 2021 and 2024, would be around 25 to 30%. Does such a decline in the capacity to pay presuppose a sharp drop in prices? This scenario does not appear the most likely. On the one hand, the evolution of credit conditions with a continuation of the evolution of the contribution rates and the duration should play a minor role in closing this gap. On the other hand, the loss of solvency should not be measured ex-ante but taking into account the nominal increase in income. Assuming that the borrower's average income evolves like the gross disposable income measured by INSEE, the decline in borrowing capacity would be limited to 11% by 2024. A significant decline but absorbable by changes more gradual markets.

The preferred scenario is therefore that of a more marked adjustment in transaction volumes with a drop of nearly 17% in 2023 then 5% in 2024 for the old (representing 80% of annual housing sales), i.e. 922.000 transactions in 2023 and 876.000 in 2024, i.e. a total decline of 25% compared to the high point of 2021. In France, the adjustments are made first and foremost by volumes, with a lag for prices, the reductions of which are lower magnitude. Prices would fall more slowly by around 3% per year in 2023 and 2024. As a result, the volumes of new housing loans could fall by 20 to 25% compared to 2022.

Sources: unless otherwise indicated, all survey data in this summary refers to the BPCE L'Observatoire / Audirep Barometer, the last survey of which was conducted in February 2023 among 2061 individuals aged 18 and over.