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Inflation: Towards a soft fall in real estate prices… or collapse?

Have we come to a time in an economic situation where real estate prices are going down?

Have we come to a time in an economic situation where real estate prices are going down?

©Pascal Bavani / Agence France-Presse

economic conditions

As interest rates on real estate continue to rise, it is becoming increasingly difficult for families to obtain credit to purchase their homes.

Atlantico: As an article in Les Echos points out, real estate interest rates are rising and it is becoming increasingly difficult to obtain a mortgage. Have we reached the time of the economic situation where real estate prices will drop? Or reach a plateau?

Charles’s return: The article in Les Echos mentioned is not about price evolution but the gradual drying up of households’ access to mortgages and thus the capture of the mortgage market. This is primarily related to the sharp rise in interest rates over the past nine months: thus the 20-year fixed rate has risen from 1.10% in January to 1.85% in August 2022. But it happens in addition to the scissors effect with the rate of erosion. Limited to 2.67% which includes other costs and limits banks, leading them to reject an increasing number of loan files.

It is not here to guess about the evolution of real estate prices, but it is difficult to see how the ongoing structural changes will lead to uninterrupted price increases for a decade and even accelerate on the occasion of the Covid-19 epidemic as shown for example in the IMF real estate price index.

This development in real estate prices takes into account multiple local characteristics but is linked to different control variables: interest rates, the real income of buyers’ households that affect their borrowing capacity and their level of demand, the housing stock available at purchase…

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In this ambiguous context, professionals question the brutal and somewhat permanent nature of the adjustment, which is the only consensus regarding halting the sharp rise in recent years.

The question that comes back to declining real estate prices is whether it will be gradual or abrupt. What are the clues and economic arguments that could indicate that we are heading towards one or the other of the scenarios?

The extent to which the price has fallen is what distinguishes a breakdown (a drop equal to or more than 20% over a short period) and a correction or decline (a drop between 10-20%).

Brutal crisis conditions in the past have often been associated with the severity of the economic stagnation that often accompanies collapse, but also with conditions that oblige sellers to dispose of homes without delay due to their financial constraints, whether families, professionals (developers faced an overproduction crisis) as seen in France in The 1990s or in Spain in the 2000s, or two unstable bank players as in 2008-2009.

Pro-fall conditions are often associated with reduced demand (stagnation or decline in household income, rise in unemployment). The financial resilience of real estate professionals and the banking sector also plays a major role in the benign nature of the correction.

What are some recent examples from the history of the real estate market that shed light on what could happen in the coming weeks in the real estate markets?

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If we return to the distinction between the collapse and the correction mentioned in the previous question, we can take into account the crisis of overproduction that Spain has experienced since the mid-2000s: everything in its economy has been doubled in 20 years through excessive investment. It returned to its initial level after 10 years after severe price adjustments and deep restructuring of the real estate development and construction sectors. We can observe a more robust development of China, whose macroeconomic share in the housing and development sector is a major concern of the International Monetary Fund in its recent reports on the country.

In Ireland and the United Kingdom, the sharp drop in prices at the end of the 2000s is associated with the difficulties in the banking sector, where some of the major players were having a hard time and suddenly cut the credit tap and thus fell dramatically. The strength of the banking sector buying buyers.

In another way, the British crisis of the 1990s coincided with high interest rates and high unemployment that forced many families to put their assets on the market to avoid bankruptcy.

On the other hand, in continental Europe and France, the 2008-2009 economic crisis has caused more correction than a crisis, the last of which in France dates back to the 1990s.

Current conditions are inherently different from those of past years: general uncertainty, the possibility of an economic slowdown, the return of inflation, particularly in energy prices, and careful supervision of the mortgage market by prudential authorities. This latest market cooling engine is particularly noticeable so far.

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