Real Estate Sector Grapples with Falling Prices and Transaction Volumes
In recent times, the real estate market in Paris has experienced a significant downturn, with property prices dropping by nearly 6% in 2023, as per the annual report released by the National Real Estate Federation (Fnaim). This comes at a time when inflation continues to persist, and transactions have significantly declined throughout the year.
The decline in real estate prices is not limited to the French capital. Major cities like Paris and its suburbs are also witnessing this trend, while the decrease remains less pronounced in the top 10 provincial cities and within the top 100 medium-sized cities.
The most affected cities are those that had previously seen the highest price increases; they are now experiencing the biggest decreases. However, Mediterranean coastal cities like Perpignan, Montpellier, and Nice seem to be resisting this trend, showing price surges of up to 3%.
Freeze on Loans and Transactions Lead to Vanishing Demand
One major factor driving sellers to lower their asking prices is the dwindling number of prospective buyers. Over the past two years, French citizens have reportedly lost 15% of their real estate purchasing power, leading to an increase in unaffordable properties languishing on the market.
To put this in perspective, around 875,000 sales were concluded for existing properties in 2023, marking a drop of 21.5% compared to the previous year. This alarming scenario can be partly attributed to skyrocketing mortgage rates fueled by the European Central Bank’s decision to increase interest rates from the early 2022 levels of 0% to 4%-4.75% today.
- It’s important to note that, since January 2022, the High Council for Financial Stability capped the maximum proportion of an individual’s income that can be used for a loan at 35%.
- Fnaim suggests that the real estate sector may see a revival of transactions if prices continue to decrease – and by a significant margin. According to Loïc Cantin, President of Fnaim, property prices need to plunge by as much as 10-15% to make up for households’ lost purchasing power.
Sellers Reluctant to Lower Prices Await Market Recovery
As per Cantin’s analysis, many sellers prefer to withdraw their properties from sale instead of lowering their asking prices to attract buyers, waiting for the market to rebound before trying again. During the crisis in 1992, it took four years for home sellers to reduce their prices enough to meet the demands of potential buyers.
This situation might repeat itself unless there is a rapid decline in interest rates to provide prospective buyers with more purchasing power. However, many economists believe that this is highly unlikely, as the European Central Bank is not expected to lower its rates below 3%.
Where Does This Leave The Real Estate Market?
With property sellers holding out for higher prices and buyers facing shrinking purchasing power due to increased mortgage rates, the Parisian real estate market seems to be caught in a delicate balance. It remains uncertain whether the adjustments required would happen on the seller or buyer side, but one thing is clear: a substantial shift in either direction is necessary to rejuvenate the market.
While the current outlook appears grim, Paris and other major cities still hold significant investment opportunities for those willing to navigate these uncertain times and seize emerging possibilities.
In conclusion, while Paris’s real estate market faces a decline in prices and transaction volumes amidst egging inflation and interest rates, there is still a glimmer of hope for revival provided stakeholders act strategically and respond to the evolving market dynamics.