Real estate crisis in2023: Government denial - Magnolia.fr

The real estate market is in complete stagnation, with dangerously declining loan production and low sales. The blame for this lies with the rising interest rates over the past year and a half. But it's not just that. The inaction of the government and the complete rigidity of the Financial Stability Council regarding credit standards are also responsible for this critical situation in the industry.

Difficult access to mortgage loans The facts speak for themselves. For the first time since March 2016, the production of housing loans fell below 10 billion euros in August 2023, marking a 50% decrease compared to the same period last year. The number of sales also declined, dropping below one million real estate transactions in a year, which is a 20% decrease. The rise in interest rates, which reduces the purchasing power of families and their ability to buy real estate, is not the only reason for this decline in activity.

The outdated norms for establishing rules for providing loans by the Financial Stability Council (FSC) at the end of 2019 occurred against the backdrop of a real estate market boom. At that time, the regulator set the debt level at 33% of net income (including borrower insurance), then raised it to 35% a year later, and limited the repayment term to 25 years (except for new buildings, which were allowed 27 years). During that active period, these lower rates were historically low. Remember, there was an opportunity to borrow money at 1% (excluding mortgage insurance and other guarantee fees), while the average rate for 20 years now exceeds 4%. The goal was to regulate the distribution of mortgage loans to prevent market overheating and potential issues such as excessive household debt and financial imbalances in banks. Strangely, consumer credit, which is actually more responsible for debt problems and overload, was intentionally left unregulated. One might question the appropriateness of the rules established three years ago, given that today's context is completely different. The standard now becomes a factor of exclusion for families who are quite capable of repaying their debts, because, in addition to being applied with excessive rigidity, it does not take into account one important concept in the mortgage sector: the remaining amount for living. Borrowers with sufficient income may have debt exceeding the established standard and still live decently. The level of debt and the remaining amount for living are two interconnected concepts, as the Supreme Court recently reminded, but the FSC remains unyielding.

The first concession: a slight easing of the lending conditions for investors. Since June of last year, out of the 20% flexibility that allows banks to deviate from the rules, now 30% is completely free, compared to the previous 20%. A promille of mortgage lending.

An unsuitable market procedure Another obstacle to accessing mortgage credit is the imperfection of the market procedure, which became evident with the sudden rise in interest rates. The "scissors effect" occurs very quickly after the revision of the market interest rate, calculated quarterly... until the Bank of France decided to fix the maximum legal rate monthly starting from February 2023. This measure is a step in the right direction, but this minimal reform of the market procedure does not solve all the problems, as the basis for the calculation remains the same - the average effective rates provided over the last three months. It is difficult to speak of a dynamic market where rates are periodically increased by 50 basis points every quarter.

What is the government doing to address the crisis in the real estate market? The market doesn't need cosmetic measures, but an active policy that stimulates lending while allowing banks to do their job, which is to provide financing wisely, as they have always done. France can be proud of a very low level of loan defaults, 1.24% in 2019 according to the Bank of France, and this is mainly due to the system of fixed rates that protects households from rising rates, with banks acting as a buffer.

Nevertheless, property ownership is far from being universal in France. For the first time in 40 years, the share of people owning their homes has decreased from 57.6% to 57.3% over the past decade (according to Insee). At the same time, the number of renters has increased from 39.5% to 40.2%. Difficult access to credit may also be compounded by restrictive regulations aimed at eradicating energy-intensive buildings.

The climate law from August 2020 is gradually removing poorly rated rental properties in terms of energy efficiency from the market. Of course, this measure is sensible for the renovation of the rental housing stock, but it comes with a very tight schedule, which increases the financial burden on tenants who do not have the means to reduce the energy consumption of their properties.

Private rental housing provides accommodation for 7.5 million households, which accounts for about 25% of the total, exceeding social housing (5.3 million households). And 97% of this housing is privately owned, with about a third belonging to small landlords who rent out to improve their well-being. They have the opportunity to finance complete renovations, especially considering that MaPrimRénov is almost unavailable in multi-family buildings?

The climate law also aims to reduce land development, which specifically means focusing on building by 2024, excluding individual houses. Additionally, the cancellation of the Pinel scheme is planned for the end of 2024, and the current system of tax benefits in real estate is now linked to higher environmental conditions.

The tension in the rental housing market, insufficient decline in real estate prices, obstacles in obtaining loans due to inappropriate regulations, and the inaction of authorities—all of this together could lead to a crisis in the real estate sector. No better than a blind person is one who does not want to see..