Why House Prices Could Stay Stable in 2023 Despite Inflation and Rising Interest Rates

Thus, based on quarterly data series covering the period from 1996 to 2022, i.e. almost 30 years of evolution, Wüest Partner has developed a new analysis model which compares for the first time in France the fundamental value of housing, determined on the basis of economic criteria, at their market value, resulting from factors that are more exogenous to the economy, such as temporary speculative effects, for example. On the basis of this empirical data, Wüest Partner objectified the value of real estate by rationalizing it in relation to economic development in order to better estimate its evolution.

Result: for the year 2023, prices could fall by 0.5% for apartments and increase by 1.9% for houses if we consider current macroeconomic projections. Rates likely to reassure the market about a possible phenomenon of a speculative real estate bubble!

Fundamental value and market value: review of 26 years of evolution

What does the price of a property cover? Is it fairly assessed or should we stick to the fact that it is, above all, the result of an agreed transaction? The study carried out by Wüest Partner sheds light on the evolution of real estate market prices, using a new analysis model. In the latter, it is necessary to distinguish first of all the fundamental value of the property from its market value.

The fundamental value is determined on the basis of 5 economic variables: population, household income, mortgage rates, inflation and vacant homes. Indeed, population growth has an influence on the demand for real estate and on prices, in the same way as the consumer price index, because rents and real estate prices tend to rise in times of inflation. . The level of household income (net income from activity and property + social benefits, contributions and taxes) partly determines the level of demand. Interest rates on mortgages have a direct impact on the cost of an acquisition project and therefore on demand. The same applies to the availability of vacant homes with its consequences on prices.

Market value is the acquisition price obtained during an exchange process between a potential buyer and seller. It depends on economic fundamentals, but also on more or less objective factors exogenous to the economy, such as temporary speculative effects, local conditions or even crisis situations (the health crisis is a good example). The Wüest Partner model uses the Notaires-Insee index which measures the evolution of net seller prices, differentiated for houses and apartments.

This study shows how the fundamental value makes it possible to estimate the over or undervaluation of prices or, even, to analyze the impact of an economic criterion on the evolution of prices. Analytical work based on quarterly data series covering the years 1996 to 2022, a period that saw significant price fluctuations (rises in the 2000s, financial crisis 2008-2010 and health crisis 2020-2021).

For Bérengère Oster, Managing Director of Wüest Partner France: “As you can see from the empirical analysis we have carried out, housing prices have more than tripled since 1996, posting an increase of 238% for houses and 214% for apartments. These developments raise questions: is the surge in prices justified by the general development of the economy during this period, or are real estate prices overestimated? And what developments are possible in the coming years under different economic scenarios? These are the questions that our model attempts to answer. In the current context of a sharp rise in rates that we are going through, it is interesting to be able to take an "objective" look at the possible evolution of housing prices using a model based precisely on economic fundamentals. »

When the two values ​​(fundamental and market) are close, this may reflect the fact that real estate prices are rational and anchored in the country's economy. Large differences, on the other hand, can be a sign of speculation or irrational expectations of market participants.

Over the period 1996-2022 thus explored, market value and fundamental value evolve closely together: the fundamental value indeed explains approximately 75% of the variations in market values. An overvaluation of market prices relative to the fundamental value was however observed in the years 2005 to 2007 and then again between 2010 and 2012 and actually gave rise to subsequent value corrections.

In 2022, market value and fundamental value showed less than 1% difference. A positive signal for French real estate markets, which remain strongly anchored to the country's economy despite the change in the interest rate context in 2022.

Towards price stabilization in 2023

The empirical analysis of the data presented above then makes it possible to estimate the over- or undervaluation of real estate prices in relation to their fundamental value, to predict the evolution of prices under different scenarios, or to analyze the impact of low interest rate environment of recent years on future price growth.

For 2023, Wüest Partner relied on the macroeconomic projections of various institutes (Banque de France, Insee) presented below:

Wüest Partner was able to estimate the evolution of the fundamental value for the year 2023 in France. It would be -0,5% for apartments and +1,9% for houses. The current economic conditions should therefore not give rise to major turbulence on the real estate markets, and prices could remain stable. On the other hand, the drop in apartment prices would be a little more marked in Paris, with -2,1%.

The advantage of this model also lies in the fact that it makes it possible to make five-year projections of the future evolution of property prices on the basis of different scenarios. Wüest Partner analyzed the following five scenarios:

1. Recession: economic recession in France with, each year, a decline of 1% in disposable income,
2. Stagflation: inflation above average, without economic growth and with an increase in interest rates in order to limit inflation (consequences: increase in the mortgage rate, weakened population growth, increase in the number of vacant homes),
3. Stable prices: maintenance of house and apartment prices with a small variation,
4. Forecasts: Wüest Partner forecasts for economic development in France from 2023 to 2027,
5. Growth: sustained economic growth, boosted population growth, stagnation in the number of vacant homes, inflation and mortgage rates at levels below those of 2022.

Other results produced by this study are also very interesting. They are expressed, for example, in the form of questions that the model can answer:

“What would have happened, from 2005 to 2021, if interest rates had remained at a high level” or “What would have happened if population growth had been lower since 2005? ".

Based on precise and solid data, which currently only covers the national level, the model can be extended to take into account the disparities between rural areas and large cities. While waiting for an even more powerful version, the model developed by Wüest Partner is innovative and the notion of fundamental value is enlightening for real estate professionals.

This new analysis model is the subject of a dedicated chapter in Wuest Partner's Immo-monitoring 2023.