The real estate sector is experiencing a sharp drop in sales caused by high-interest rates and difficulty in obtaining credit. François Villeroy de Galhau, governor of the Bank of France, urges commercial banks to make it easier for consumers to borrow.

The rise in interest rates that began more than two years ago across the European Union has had an effect on the real economy, causing European residential real estate investment to fall by 54% in the first nine months of 2023 compared to the previous period, 55% lower than the average of the last five years.

This implosion of the real estate sector has been particularly evident in Europe’s richest countries. In France, the year began with construction of new housing falling to levels not seen since 2010. As wages stagnated, prospective buyers were faced with soaring inflation and increasingly unaffordable mortgages. This translated into a sharp drop in real estate transactions in the first half of 2023, particularly significant (-30%) in the Paris metropolitan area.

The French government and the ECB indicate that, for the time being, there will be no further interest rate hikes. Even so, according to the barometer of the Odoxa Demoscopic Institute, the rise in interest rates, the difficulty in obtaining credit, and concerns about the current international economic situation have caused 38% of French consumers who were considering a real estate project to cancel or postpone it.

This crisis is having a significant impact on the whole real estate sector, which represents 13.3% of France’s GDP. Real estate agencies, construction businesses, developers and, especially, credit intermediaries have experienced an increase in the number of insolvencies that had not been seen for years.

According to data from Altarès, an agency specialising in business information, during the first four months of the year, non-payments by developers have increased by 53.8%, those of construction companies by 55.6% while those of real estate agencies have almost doubled, with an increase of 84% compared to the same period in 2022.

Facilitating access to credit

With interest rates rising from an average of 1.03% in October 2021 to more than 4% in May 2023, and strict regulations on the granting of mortgages, obtaining a loan has become increasingly difficult for consumers looking to buy a home.

The governor of the Bank of France, François Villeroy de Galhau, has taken a stand against investors who expect interest rate cuts in the first half of next year, stating that the ECB is likely to keep them at 4% “at least for the next few meetings and the next few quarters”.

Even so, he urged commercial banks to “play the game”, facilitating lending to consumers, “It is desirable that the supply of bank loans now gradually recovers, but without running the risk of over-indebting households”. Bear in mind that the granting of real estate loans by commercial banks is at historic lows that have not been seen since 2015.

In this context, there has been an average year-on-year fall of 3% in house prices and this trend is expected to continue over the next six months, especially in large urban centres. Eric Allouche, CEO of ERA Immobilier, noted that property price falls are moderate compared to the collapse in sales, but that it is possible that by the end of the year house prices will fall by up to 6%.

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