Will the war in Ukraine change the Paris real estate market?

As a result of the rise in the cost of living and a surge in the price of materials, the Russian-Ukrainian conflict will undoubtedly have consequences on real estate transactions, rental and investment markets, but also on that of real estate credit.

In the face of war, real estate issues inevitably take second place. However, the conflict in Ukraine could well impact a French market which is emerging from an exceptional year, 2021. Last year 1,178,000 transactions were recorded by the Notaries of France. A summit never observed! Same trend among home builders. With 139,600 sales, the 2021 vintage is the best of the last ten years according to the Pôle Habitat of the French Building Federation. On the new side, 116,700 homes were reserved by individuals in 2021 according to the Federation of Real Estate Developers (FPI), against 131,500 in 2019, before the crisis. But for these professionals, this decline is due to a lack of offers itself linked to the drop in the number of building permits. As for today, in all probability, 2022 will not be as good, due to the rise in the cost of living and the surge in the price of materials caused by the war.

Real estate morale

The first impact is psychological. An armed conflict can weigh on the mood of households. Optimism is fundamental when it comes to carrying out a real estate project, and so the market could slow down. This is the pessimistic view. If we see the glass half full, the current uncertainties could reinforce the safe haven aspect of the typical Parisian stone buildings, with the key to maintaining a certain momentum. But the tone of the market is due to many other elements as well. If the needs and desire to buy remain strong, prices could continue to rise (they have increased by 7.1% over one year according to the latest notaires-INSEE index).  With interest rates rising again and buyer solvency, we must not forget that for the French, real estate is a personal project, and the economic situation is only one of the elements.

Return of inflation

What is certain, however, is that the war in Ukraine is hitting the economy. Admittedly, the Banque de France is showing a certain optimism about growth, which would nevertheless remain positive. “Despite the expected slowdown in the coming quarters, annual average GDP growth would reach 3.4% in 2022 in the conventional scenario and 2.8% in the degraded scenario”, estimated in a note from March 13, 2022. For its part, the government is preparing to revise its objectives downwards when it was counting on growth of 4% in 2022. Inflation is indeed there. In February 2022, it stood at 3.6% on an annual basis, compared to 2.9% in January. It could drop to 4% in March 2022. Soaring energy prices or many food products are hitting the French hard in the wallet.

It remains to live

Borrowers are the first to bear the brunt of this price increase. They must indeed devote more resources to their daily expenses (transport and energy in particular). This will obviously influence their debt capacity. They will thus have to take care of their remainder to live (what remains once the monthly payment has been made). This amount is usually set by banks at 850€ for a single person and 1,500€ for a couple, plus 300€ per dependent child. “With an increasing transport and energy budget, especially for those who buy an old house and who need a new car, this amount which is used to meet all current expenses may no longer be sufficient”, warns Sandrine Allonier, director of bank relations for the broker Vousfinancer.

Flexibility

To lend, banks ask borrowers for residual savings in addition to their personal contribution. In classic circumstances, it most often counts for six months of monthly payments. Will the banks raise their demands in the current inflationary environment? “For the moment, we are not seeing any change, even if they are monitoring the resilience of borrowers via the remainder of life”, replies Didier Laporte, manager of the broker Universal Broker Services. “Banks are in a period of vigilance focused on risk control. But they remain selective and modest profiles will be temporarily excluded pending a return to normal, encouraging prospects and tangible confidence indicators. The banks will rely, as during the health crisis, on measures to support the economy and households. “

New: additional costs to be expected

Inflation also concerns construction materials, the war and the crisis blocking the supply of many raw materials. And many of them (cement and brick in particular) require energy for their transformation, energy which also burns. The result? Since January 2022, elements containing steel (concrete reinforcing bars, reinforcements, etc.) have jumped by 15 to 25%, terracotta products by 25%, explains the president of the Confederation of craftsmen and small businesses in building (Capeb) on the Capital.fr website. Wood, concrete, insulation, aluminum are in the same boat. This is enough to cause prices to explode again… Individuals who intend to buy new, build or renovate an old home must imperatively provide for these additional costs in their financing plan.

Indexed prices

Those who have already launched their new project are also affected. Individual house construction contracts (CCMI) include a price indexation clause based on the BT 01 index, which measures the increase in construction costs. However, BT 01 continues to rise. With serious consequences for some. “We had to pay 8,000€ more than expected,” explains Sarah who, with her husband, is building in the Paris region. More and more home builders are asking their customers to provision within 2-3% of the price of the home, or even more to deal with price increases. Individuals who buy from a promoter also have an interest in keeping money aside, sales contracts in the future state of completion (Véfa) being again indexed on BT 01.

Rental side

The investment is not spared by the consequences of the war in Ukraine. With rising inflation, the real rental yield falls. The best example is in Paris. In the capital, the typical stone buildings yield classic empty rental (property income), in the 3% gross range. Given inflation at 3.6% in February 2022 and probably 4% in March, the real return becomes negative… Landlords could be tempted to raise rents to regain returns. But beware: tenants have to deal with the rising cost of living. Increasing their rent could destabilize them, increasing the risk of non-payment, or even vacancy… And then the conditions for increasing rents are strictly regulated and can only be applied in very specific cases.

More expensive money

Interest rates, on the other hand, are rising. Between January and March 2022, they picked up between twenty and forty basis points, with the average twenty-year going from 1.10 to 1.35/1.40% gross. Rather than caused by the war, “this increase is explained by the rise in inflation and government borrowing rates”, analyzes Ludovic Huzieux, co-founder of Artemis Courtage. As for the future  “We are in a period of excitement. A bank announces to us for the end of March a new increase of twenty to twenty-five points”, indicates Cécile Roquelaure, director of studies at Empruntis. For this broker, “the rise continues, but gradually. The risk is to destabilize certain households while the banks announce ambitious commercial objectives”. Be that as it may, one thing is certain: more expensive credit could only amplify the consequences of the war on real estate.

Real estate: tips for selling, buying and renting in 2022

If you are a buyer, plan for a larger living allowance and increase your residual savings to deal with inflation. Remember that banks will ask you for at least 10% down payment, but the greater your equity, the easier it will be to obtain credit. Have a broker do a feasibility study before launching your project to find out if you meet the banks’ criteria.

If you are a seller, set an objective price for your home, without overvaluing or undervaluing it. Remember that buyers are knowledgeable and know the market. You can also ask your future buyers questions about their financial means and their ability to obtain a mortgage.

If you are a landlord, keep your feet on the ground when it comes to rent. Stay attuned to your tenants, especially if they tell you about future financial difficulties. Your objective is to prevent unpaid bills and rental vacancy.

If you are a tenant, get closer to your landlord as soon as possible in case of financial difficulties. Better to anticipate, knowing that unpaid rents are difficult to catch up. Owners or tenants, you can contact your departmental housing information agency, which provides valuable advice. You can also consult our file Preventing unpaid rent.

Source: PAP.fr