2023 Property Market: Variables to Watch

Many property-related life projects were disrupted in 2022 following changes in certain key variables. Buyers, sellers and industry professionals had to adapt their ambitions and actions to a changing and uncertain landscape. This applies particularly to the progressive increase in the usury rate.

The year 2023 presents just as many uncertainties, as observable trends struggle to reveal a clear picture of what tomorrow’s property market will look like. By analysing the evolution of each important variable, everyone must develop a precise strategy to hope to get ahead. Finding the right moment to buy, to sell, to present an application in line with the project, etc. The stakes are significant, and we will attempt to define their scope.

Interest Rates on Property Loans

The first variable that is currently generating considerable discussion is the average interest rate, which has been increasing significantly since early 2022, regardless of the loan term. All specialists agree that this trend is set to continue, and it seems probable that the 3% threshold for a standard 20-year loan will be reached this year.

This development is undoubtedly disrupting many property projects and encouraging a dynamic start to the year, in anticipation of more expensive loans if applied for later, as well as difficulties in getting certain applications through that have slightly tight debt-to-income ratios.

Property Price Levels

In contrast to the trend of credit becoming more expensive, another downward trend can be observed in the price of properties coming onto the market – or rather, the price levels at which transactions are being completed. Several factors explain this.

Firstly, the post-COVID surge led to a significant – and artificial – increase in price levels in 2021 and early 2022. In many regions, the increase has since stabilised, and some of the declines observed may also reflect a return to more logical (reasonable?) price levels.

Additionally, still related to the health crisis, the phenomenon of rural exodus has led to a decrease in demand within major cities, where price decreases are most pronounced. Lower demand logically leads owners to reduce their asking prices in order to sell.

Furthermore, the difficulty in obtaining a property loan hampered by the usury rate, which we will return to below, may explain limited offers from buyers who would naturally be purchasing properties on the market. Once again, owners have no choice if they want to sell quickly but to reduce their net selling price.

Finally, the arrival on the market of properties known as “thermal sieves”, namely those threatened with a progressive ban on renting and which may include properties rated E, F and G on the energy performance certificate (EPC), does not help maintain prices. From 1st January 2023, some of them fell below the energy indecency threshold (450kWh/m² of annual electricity consumption) and their rental is already illegal. One can easily imagine owners of such properties who do not wish to carry out significant works putting them on the market at rock-bottom prices.

All this certainly explains to a large extent the observed decline in transaction prices. The real question remains: will general property price levels continue their descent and are we witnessing a genuine shift in the market in this direction?

The Usury Rate

As we mentioned, and to recap, the usury rate protects consumers from excessive banking appetite. Banks are thus unable to grant loans whose annual percentage rate of charge (APRC) exceeds the usury rate, which hampered the completion of transactions in 2022.

On 1st January, the usury rate was raised again, thanks to the quarterly review carried out by the Bank of France, reaching 3.57% for loans concluded for a duration of 20 years or more (against 3.53% for those with a duration of between 10 and 20 years). The usury rate was then raised again to 3.8% from 1st February. At the same time, the Bank of France announced that it would be reviewed monthly until 1st July.

While this measure seems comfortable for taking out a property loan under the best conditions – recall that it was set at 2.41% a year ago – the trend is in fact merely following the increase in rates charged by banks, and some applications continue to hover around the limit or struggle to be completed despite undeniable qualities. The flagship measure taken by the Bank of France enables many transactions to proceed more smoothly. However, the usury rate remains a variable to monitor, and if necessary, there are solutions for improving your application and obtaining your property loan.

Sales Volumes

Some note that 2022 saw the number of property transactions decline compared to 2021. On this point, it should be highlighted that 2021 benefited from the relative calm of 2020 to make up for lost time and broke all records. Rather than a decline, we are more inclined to expect a return to normal.

In addition, for the reasons set out above, many transactions were prevented or slowed by the usury barrier and the need to improve applications. Many first-time buyers, for example, were unable to proceed with their project but may be able to try again in 2023. Other buyers remained pending a raised usury rate and the beginning of this year should prove dynamic on all fronts – perhaps with a further jump in sales volumes.

Taxation

To conclude, let us look at changes in taxation applicable to property, which may have repercussions on sales and owners’ strategies.

The doubling of property tax deficit, for example, may encourage undertaking strengthening works to improve energy performance, rather than seeking to sell a property with a poor EPC rating. For reference, Article 156 of the General Tax Code now provides that the property tax deficit limit is set at €21,400 “to the extent of the amount of deductible expenditure on energy renovation works enabling a property to move from an energy class E, F or G to an energy performance class of A, B, C or D at the latest by 31st December 2025”.

In agricultural property, land and agricultural land groups (GFA) subject to gratuitous donation are exempt from donation or inheritance tax up to 75% of their value up to €300,000, and 50% beyond this. This facilitates intergenerational transfer and relieves heirs of taxation.

For investors, note the progressive reduction in the tax relief applicable via the Pinel scheme, in 2023 and 2024. The Censi-Bouvard scheme, for its part, is coming to an end for new acquisitions.

Finally, while the council tax for primary residences is officially a thing of the past, this is not at all the case for secondary residences, whose owners are noting (in counterpart?) a significant rise in the rate in most cases. This is also the case for garden shed tax, which soars by 8% in 2023. This may perhaps influence the property market somewhat through the sale of properties that have become fiscally too costly.

Be vigilant on all these points when considering your property projects in 2023!